ANSARI, J. - The assessee company, that has since gone into liquidation, was incorporated in 1937 with the object, inter alia, of acquiring and working the rights title and interest in the match factory of on A. V. Thomas at Mudical. The memorandum of association had further empowered the company to manufacture and deal in acids, alkalis and other chemicals. The business of manufacturing matches was carried till the account year ending 30 April, 1941 thereafter the profits from the business began to fall off on account of war conditions, and the company began to manufacture plywood chests for tea as contemplated by clause 3 of the objects. The company started manufacturing paints in the account year ending 30 April, 1942, and undertook the manufacture of lemon-glass oil in the next account year. The manufacture of matches having become unprofitable the company on 9 May, 1943, entered into an agreement with one Rao Sahib Natesa Iyer for the sale of the lands, buildings, plant and machinery relating to manufacture of matches. The consideration was fixed at Rs. 5,75,000 and out of that amount, Rs. 57,500 was payable as advance, and the remaining sum to be paid within sixty days from the date of the agreement. It was further agreed that the price should not cover the manufactured goods, chemicals, other raw other assets not described in the schedule to the agreement. Nevertheless the intended purchaser committed default, and on 9 August, 1943, a fresh agreement was entered with the same person for the sale consideration of Rs. 7,35,000. The second agreement purports to condone the default because of the circumstances being beyond the purchasers control and to sell in addition to what was covered by the earlier agreement chemical and paper for match manufacturing. After the sale had been concluded, the directors confidential report of 1 August, 1944, to the shareholders showed the price to have given a capital appreciation of about six times the cost, and sale of chemicals also to have resulted in a substantial profit.
The Deputy Commissioner of Income-tax, who had already assessed the company on the income of Rs. 36,498-6-4 for the accounting year ending 30 April, 1944, found the profit got by the sale of the stores and chemicals to be also assessable to income-tax, and therefore issued notice under section 25 of the Travancore Income-tax Act to the companys liquidator on the ground of the aforesaid profits having escaped earlier assessment. The position taken by the official liquidator before the Deputy Commissioner of Income-tax, Trivandrum, was that the money realised by the sale of the match factory as a going concern being a realisation sale, were only capital gains and were not liable to assessment. The officer relying on clause 5 of the memorandum of association, which authorised the company to manufacture and deal in acids, alkalis and other chemicals, and on the directors confidential report of 1 August, 1944, held that the sale did not constitute realisation sale, that the plea of 'no business having been carried on thereby' was incorrect and that the company was liable to income-tax on the profits of Rs. 3 lakhs. The appeal before the Commissioner of Income-tax was partly successful in that the commissioner found the company to have made the profits of only Rs. 1,13,259, that being the difference between the two sales prices under the agreements. The Commissioner thought that as in the earlier agreement the company did not agree to sell chemicals, whereas the later agreement covered the commodity, the difference between the two consideration would be the profit, which the assessee company had earned on the sale of the chemicals and match papers. The appeal before the Appellate Tribunal was fought on the grounds that the sale of raw materials did not constitute the companys stock-in-trade, that the company had ceased to manufacture matches, and that the transfer of raw material by the later agreement being with a view to enable the purchaser to start the business of manufacturing matches, the whole transaction constituted realisation sale. The Tribunal did not accept the argument, held the sale of chemicals and match papers to be part of companys business, and to be trade liable to assessment.
Certain questions were thereafter asked to be referred to the High Court and under section 113(1) of the Travancore Income-tax Act, 1121, the following two questions have been referred :
'(1) Whether the transaction of sale of the raw materials along with the business, including machinery, plant and premises, is a revenue sale and whether in the facts and circumstances of the case, the sum of Rs. 1,15,259 has been rightly charged to income-tax ?
(2) Whether the decision, that the sale of match, machinery and premises, was distinct from the sale of chemicals is legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials ?
The statement of facts sent along with the two questions was found meagre by the High Court and the Tribunal was directed to state further facts which has since been done. The short point arising in this reference for consideration, therefore, is whether the sale of chemicals and the match papers by the second agreement amounts to realisation sale so as not be liable to Income-tax. But before deciding this point it would be of advantage to clear the grounds. The advocate for the Department has rightly argued that the company under article 5 of the memorandum of association were authorised to manufacture and deal in chemicals as well and therefore doing business in such commodity would not be ultra vires. He has also drawn our attention to sales of chemicals by the company in the year prior to the second agreement, which sales have been also relied on by the Appellate Tribunal in its dismissal order of the appeal, and has argued that selling the commodity by the second agreement amounts to the assessee company doing its business. One such sale is on 24 July, 1943, to educational institutions and another is on 30 October, 1942. The advocate for the Department has further argued that the conclusion concerning the company having carried on its business of selling chemicals by the second agreement is a finding of fact, which the Appellate Tribunal in exercise its powers could give, and withe which we cannot justifiably interfere. The assessees advocate has sought to place before us a copy of the memorandum of association with a view to show that the company was authorised only to manufacture and deal in chemicals; and the Tribunal has erred in holding the sale of chemicals not manufactured by the company to be covered by the memorandum of association. Obviously we cannot in a reference under the Income-tax Act admit any document and therefore it must be taken as established in this reference that the company was doing a business in selling chemicals that the assessee had not manufactured. We, however, feel that such a decision is not fatal to the companys claim; for even the sale of commodity, in which the particular vendor may be doing business, may amount to realisation sale, where the sale is with a view to the more advantageous disposal of the assets.
It is also clear that part of an assessees business may be sold, and what is got from such a sale still would be proceeds of a realisation sale, though the assessee be continuing to carry on; some other business. This proposition is well supported by the pronouncement in Commissioner of Income-tax v. Shaw Wallace and Co. 1, where Sir George Lowndes has observed as follows :
'It is contended for the appellant that the business of the respondents did in fact go on throughout the year, and this is no doubt true in a sense. They had other independent commercial interests which they continued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connexion with the continuance of the respondents other business. The profits earned by them in 1928 were the fruit of different tree, the crop of a different field.'
Therefore, the company subsequent to the date of sale having carried on; business other than match-making would not be of much importance in the reference.
Coming to the main point it is clear that one test for treating a transaction to be realisation sale is to be found in Doughty v. Commissioner of taxes 2. There two partners were carrying on business as soft goods merchants, and sold the business to a company in consideration of allotment of shares and the discharge of the partnership liabilities. The nominal value of the shares was more than the amount to the credit of the partnership, and the item stock-in-hand in the firms last balance-sheet was written up and renamed stock and goodwill. The Commissioner contended that the excess was taxable profit; but it was held by the Privy Council that the sale was one entire transaction so that no sum could be identified as the price for the stock and no taxable profit emerged. Lord Phillimore in delivering the judgment for the Judicial Committee has observed as follows :
'Income-tax being a tax upon income, it is well established that the sale of a whole concern, which can be shown to be a sale at a profit as compared width the price given for the business, or at which it stands in the books, does not give rise to profit taxable to income-tax.
It is easy enough to follow out this doctrine where the business is one wholly or largely of production. In a dairy farming business or a sheep-rearing business where the principal objects are the production of milk and calves or wool and lambs, though there are also sales form time to time of the parent stock, a clearance or realization sale of all the stock in connexion with the sale and winding-up of the business gives no indication of the profit (if any) arising from income; and the same might be said of a manufacturing business which was sold with the leaseholds and plant, even if those piece-goods formed a very substantial part of the aggregate sold.'
It follows that the test for ascertaining whether the particular deal is one of realisation sale is to find whether the deal of stock-in-trade is single or divisible. Should it be not severable the transaction would justifiably be held to be a clearance sale. The advocate for the Department has argued that even in such a case if part of the consideration be traceable to the sale of the commodity, which the vendor had been selling earlier as part of the business, the gain would be taxable income. In support of the argument he relies on the following observation of Lord Philimore in Doughtys case :
'Even in the case of a realisation sale, if there were an item which could be traced as representing the stock sold, the profit obtained by that sale, through made in conjunction with a sale of the whole concern, might conceivably be treated as taxable income.'
The assessees counsel has tried to read this passage as connected with sale of business consisting in buying and selling, and not with that of a manufacturing concern. It is obvious that the aforesaid observation cannot be so circumscribed, but it is equally clear that thereby the test elaborated earlier had not been discarded. Firstly because Hickman v. Federal Commissioner of Taxation 2 has been without any disapproval referred to in the judgment. There certain items were separately assessed in the sale and the High Court had nevertheless held the transaction to be single. In this connection Knox, C.J., had observed as follows :
'In this case it is clear from the words of the contract of 1st January, 1918, that it is an indivisible contract of; or the sale of the land and stock - substantially the whole of the assets of the business theretofore carried on by the appellant - and that the allocation of portion of the purchase money to the live-stock and the balance to the land, presumably made for the convenience of the parties does not convert the single contract into two -one for the sale of the land and the other for the sale of the live-stock for independent considerations. The single transaction must be treated as effecting a complete change of ownership of continuing business and of the assets employed in carrying it on.'
It is, therefore clear that where the bargain be composite, integrated and indivisible, it would be impossible to state which part of the single consideration has resulted in capital gain and which has yielded profit as income. In such a case the distribution in the assessees account book would not be decisive and we, therefore, find no disapproval of the Australian decision by the Privy Council. The observation would, therefore, cover only such realisation sales as are divisible and parts of the considerations easily traceable as the prices of the stock-in-trade. Even in such cases if sellings be with the view to make more advantageous disposal of the capital assets, they would nevertheless amount to realisation sales.
In Marshalls Executors v. Jolly a partnership consisting of three persons carried on a trade of dealing in land. Land purchased by the partnership was developed and sold by a limited company under agreement and the price to be paid to the partnership for the land so developed was fixed after the sale. A partner died and certain land then belonging to the partnership was in the course of development by the limited company. His executors agreed that the most practicable way in which to realise the assets was to allow the development of the land to be completed and to postpone the account until the land been sold. His executors were assessed for income-tax on the profits made after the partners death on the ground that then were carrying on the partnership business. But it was held that there was no evidence that the executors had agreed to carry on the partnership business, the agreement being merely to postpone their right to an account and to their share of the proceeds until such time as it was practicable to realise the assets. Again in Wilson Box Ltd. v. Brice 2 the appellant company was formed for 2,500 payable in the shares of the company. All the shareholders later agreed to sell those rights to two gentlemen for 5,000. This agreement was the subject of litigation, and in settlement another agreement was made, whereby it was agreed that the previous agreement was made, whereby it was agreed that the previous agreement should be annulled and that the company should go into voluntary liquidation and the liquidator should sell the foreign rights in the patent to the purchasers for 20,000. The purchase money was distributed among the shareholders according to their respective shareholdings and treated as part of the distribution of the assets of the company in liquidation. The revenue authorities claimed that such sale of rights was a trading transaction, the profit of which was assessable to income-tax. But it was held that there was no evidence to support their decision and the realisation of the assets by the liquidator was in the performance of the duty of realising the assets. In this connection it would be also useful to have before us the following passage from Simons Income Tax (Vol. II, pages 28 and 29, 2nd Edition :
'The mere realisation of assets does not constitute trading. It depends entirely on the operation involved in the realisation whether trading will be held to have been carried on. Important points for consideration generally are : (i) whether purchases were made in connection with or with a view to the more advantageous disposal of the assets, (ii) whether any actions were performed or contracts entered into which complicated the matter of realisation, or (iii) whether the method of realisation adopted was the best or only method...'
We think that judged by the aforesaid tests the deal before us is but one of realisation sale. The second agreement is appendix B1 to this reference and its relevant extracts read as follows :
'Whereas the purchaser had not been able to fulfill his obligations under the agreement of sale... and whereas in appreciation of the unforeseen difficulties experienced by the purchaser by circumstances beyond his control the vendor has agreed to condone the default and grant a further extension of time on certain modifications and conditions subject nevertheless to the essential conditions of purchase and sale embodied in the original agreement of sale. This agreement witnesseth as follows :
The purchaser shall pay the balance out of the sale consideration of Rs. 7,35,000 being the value for the land, buildings, fixed-machinery pertaining to match manufacturing and the value of chemicals and match paper for match manufacturing as follows : ...
(2) It is agreed that the vendor will work the factory on account and at the risk of the purchaser from the 19th day of August, 1943, provided always that the ownership and the possession shall not pass to the purchaser until after the payment of the full amount of the sale consideration...
(5) It is further agreed that on default of any of the covenants or conditions of this sale by the purchaser, this agreement shall terminate and the vendor shall be competent after appropriating whatever amounts till then paid by the purchaser, to sell the property and the chemicals and match paper by private negotiations or by advertisement after due notice by registered letters within five days of the date of any such default is given to the purchaser. The vendor shall then apply the whole or part of such sale proceeds towards the balance due out of the total sale consideration and the expenses incidental to such sale and remit the surplus if any to the purchaser within ten days of the receipt of such sale provided always that the purchaser shall not be liable for any short-fall even after such sale.'
It is clear that the agreement is one entire bargain, and no part of the consideration can be identified as the price for the chemicals and match paper. What the Department has done is to deduct from the price under the second agreement that covers the chemicals as well as match paper, the price under the first agreement that did not cover those, and treat the difference as the income from the business of selling the chemicals. We think by adopting such methods the second agreement does not become severable so as to identify part of its consideration as the price for the raw materials; for, had the purchaser failed to pay what the Department now assesses to be the price for the land etc. the chemicals would no have become the purchasers property, and had there been default in payment of what is called the sale price of chemicals the sale of the machineries would not be complete. It is equally clear that until the whole amount be paid, the purchaser was running the risk of losing the whole of what had been sold by resale under paragraph 5 of the agreement. It would be difficult in these circumstances to treat the second agreement as severable and not one indivisible deal. It would be thus realisation sale according to the test laid in Doughtys case 1. It was argued that the directors confidential report of August, 1944, by treating part of the consideration as capital gains and part as profits, distinguishes the case before us; but then Knox, C.J., in Hickmans case 2 found such entry in the assessees account books as not affecting what otherwise was an indivisible contract and Lord Phillimore did not disapprove of the decision.
Applying the other tests it is equally clear that the sale of the chemicals had been with a view to bring about the sale of the match factory. For there had been an earlier agreement, but the purchaser had made default. Condoning the default and providing for the vendor to work the factory before the price be fully paid though at the risk of the purchaser mean giving facilities to the purchaser to conclude the bargain. The additional sale in the second agreement is thus closely linked with the facility for starting the work and is therefore for the better realisation of the sale of the business that had been closed earlier due to not being profitable. In these circumstances the view of the Tribunal and the taxing authority appears to be untenable.
The learned advocate for the Department has then urged that the transactions being indivisible is a question of fact and the Tribunals conclusion concerning it in this case is therefore final. We feel this finding of fact by the Tribunal to be vitiated by error of law, as Doughtys case 1 has been treated to support a proposition which it does not. Moreover the Tribunal has overlooked that what is done after a business is closed and in order to bring about better realisation sale does not amount to carrying on the business. It has failed to distinguish between contracts that are made before business is closed from those that are formed afterwards with a view to realise the assets. Nor do we think any argument can be built on there being no closure of the business to sell chemicals; for the sale sought to be taxed is of raw materials for manufacturing matches and is linked with the sale of the factory. The advocate has next argued that even sale of capital assets may amount to doing business and be liable to income-tax. In this connection he has relied on the observation in Saroj Kumar Mazumdar v. Commissioner of Income-tax 1. We do not take the learned judge as discarding the rule that when realisation sale is indivisible, the sale is not liable to income-tax.
Now coming to the two questions sent to this court, it is obvious that the sale of the raw materials is linked with that of the machinery, plant and premises, the two are indivisible, and therefore no amount can be allotted to the sale of raw materials and so charged to pay the income-tax. Therefore the sum of Rs. 1,13,529 has been wrongly charged to pay income-tax. So far as the answer to the second question is concerned, it must be given in view of the terms of the agreement. We have already shown that consideration is indivisible, and failure to pay any part may result in resale of entire properties. Accordingly the sale of machinery is not distinct from the sale of chemicals and any decision so separating the two is legally not warranted. Thus what has been allotted as the price of chemicals is not legally correct and the transaction is inclusive of raw materials and is a single one. That is our answer to the second question. Let the answer be sent to the Department, and we give the assessee Rs. 100 as the costs of the reference.
Reference answered accordingly.