J.M. Shelat, C.J.
1. This is a reference under section 66(1) of the Income-tax Act, 1922, at the instance of the Commissioner, and arises out of the assessment for the assessment year 1960-1961 and of which the previous year is Samvat year 2015 (corresponding to the period November 12, 1958, to October 31, 1959). The assessee-firm was constituted under a partnership deed of June 29, 1957, and was comprised of seven partners with shares specified below :
1. Keshavlal Trikamlal ...... 25%2. Himatlal Lavjibhai ...... 8-1/3%3. Kantilal Lavjibhai ...... 8-1/3%4. Chandulal Lavjibhai ...... 8-1/3%5. Vardhman Moolji ...... 18-3/4%6. Virchand Chunilal ...... 18-3/4%7. Ratilal Maganlal ...... 12-1/2%
2. Clause 2 of the deed of partnership provided that the main business of the firm was to be the purchase of open plots of land for construction of building, construction and sale of new building and any other business addition thereto with the consent of all the partners. After the firm was so constituted, it purchased in Samvat year 2013 two plots of land admeasuring in all 1,250 square yards in Surendranagar. The land was purchased not in the name of the firm, but in the names of two of its partners, Keshavlal Trikamlal and Chandulal Lavjibhai. That was done because clause 10 of the partnership deed provided that contracts pertaining to the business of the firm should be entered into by the said Keshavlal Trikamlal and Chandulal Lavjibhai on behalf of the firm and that clause forbade the other partners from entering into contracts on behalf of the firm and that clause forbade the other partners from entering into contracts on behalf of the firm. The land was purchased at a total cost of Rs. 70,167 and according to the building construction account maintained by the firm, the expenditure incurred by the firm during Samvat year 2013 with reference to this land came to Rs. 1,54,398 which included the cost of the land and also construction expenditure incurred during that period. In Samvat year 2014, or which the relevant assessment year would be 1959-60, a further expenditure of about Rs. 10,000 was incurred which brought the total outlay at Rs. 1,64,909. During Samvat year 2014, the firm sold certain materials amounting to Rs. 3,881. During these two years, forty shops in all were constructed on the aforesaid land, out of which twelve shops were sold during Samvat year 2014 for an aggregate amount of Rs. 79,499. On that amount having been credited, there was left at the end of Samvat year 2014 a debit balance in the aforesaid building construction account of Rs. 81,529. During Samvat year 2015, the assessee-firm did not sell any of the remaining twenty-eight shops. It appears that on October 22, 1958, the partners came to an oral understanding under which it was agreed that the remaining twenty-eight shops should be distributed amongst themselves as nearly as possible according to their respective shares in the firm and thus adjust the aforesaid debit balance by crediting as against it their book value fixed upon by the partners. The aforesaid oral agreement was recorded in a formal deed which the parties called the deed of distribution executed by them of March 14, 1959, and registered on March 16, 1959. The distribution of the twenty-eight shops was made under the said deed in favour of the seven partners forming themselves into three groups. The result of that transaction was that Keshavlal Trikamlal, called the party of the first part, got seven shops valued at Rs. 22,250, Himatlal Lavjibhai, Kantilal Lavjibhai and Chandulal Lavjibhai, called the party of the second part, jointly got seven shops valued at Rs. 24,030 and the rest of the three partners Vardhman Moolji, Virchand Chunilal and Ratilal Maganlal, called the party of the third part, got fourteen shops valued at Rs. 42,720. The aforesaid deed described the shares of the said Keshavlal Trikamlal as 25 naye paise, the share of the party of the second part as 27 naye paise and the share of the party of the third part as 48 naye paise, thus making a total of 100 naye paise. It will be seen that the shares described in this deed did not exactly correspond with the shares of the parties in the firm as set out in the deed of partnership. In the account for Samvat year 2015, which was made up by the parties thereafter, certain further expenses in the sum of Rs. 2,717 in respect of the aforesaid shops were debited and a sum of Rs. 77 was credited as the sale proceeds of certain materials sold. According to the deed of distribution, the aggregate value of the shops agreed to by the partners was shown at Rs. 89,000. This left a surplus of Rs. 4,831 in the said construction account which amount was carried to the profit and loss account for Samvat year 2015. That being the position of the accounts, in the returns filed by the firm for the assessment year 1960-61, the said amount of Rs. 4,831 was shown as the taxable income of the firm for that year.
3. During the assessment for the assessment year 1960-61, the assessee-firm contended before the Income-tax Officer that no further profit should be taken to have been made by the assessee-firm in respect of the twenty-eight shops distributed amongst themselves by the partners over and above the said amount of Rs. 4,831 disclosed as aforesaid in the said construction account and the profit and loss account of the firm. It was contended on behalf of the assessee-firm that the distribution of the twenty-eight shops amongst the partners could not be treated as a business or a commercial transaction, that is to stay, a sale yielding profit. The Income-tax Officer declined to accept that contention in the view that he took, namely, that the twenty-eight shops were the stock-in-trade of the assessee-firm and the profit made in dealing with such stock-in-trade in whatever manner was liable to tax. Having taken that view, he took one step more and considered the question as to what should be the correct amount of profit in respect of the said transaction. He rejected the book value of the shops fixed by the assessee-firm at Rs. 89,000, and estimated the real value of the shops at Rs. 1,70,000 on the basis of the sales of the twelve shops for Rs. 79,499 effect in Samvat Year 2014. He computed in this manner the profits at Rs. 85,754 instead of Rs. 4,831 disclosed in the said accounts and in the returns of the firm. In an appeal before the Appellate Assistant Commissioner, the assessee-firm took up the same contentions, and relied upon two decisions in Sir Kikabhai Premchand v. Commissioner of Income-tax and Commissioner of Income-tax v. Sir Homi Mehta's Executors. The Appellate Assistant Commissioner took the view that the principle laid down in these two decisions was applicable to the facts of the present case, and allowed the appeal. The Income-tax Officer, however, carried the matter in appeal before the Income-tax Tribunal, where it was contended on behalf of the revenue that the transfer of the twenty-eight shops in the names of the partners constituted a business transaction in the same fashion as it would if the transaction was with an outsider and that the assessee-firm was liable to account for the profits on such transfer of shops at the market value of the shops. It was also contended that when trading stock represented by the twenty-eight shops was taken out of the business, the price which ought to have been credited to the business of the firm ought to have been the market value on that day. The Tribunal rejected these contentions and came to the conclusion that the transaction was one of a division and distribution of the assets and that the principle laid down in Sir Kikabhai's case applied, and confirmed the decision of the Appellate Assistant Commissioner.
4. The Commissioner, as we have said, has challenged this finding and on his behalf the learned Advocate-General contended that the principle laid down in Sir Kikabhai's case as also in the case of Sir Homi Mehta's Executors was not applicable to the facts and circumstances of the present case. His contention was that the facts of the present case did not warrant the application of the principle laid down in those two decisions inasmuch as they were entirely different from those in the said two decisions. In the present case, the facts, which admit of no dispute and on which the Tribunal proceeded to consider the case, are (1) that there was discontinuance of the business of the firm on and from October 22, 1958, when the partners agreed to distribute amongst themselves the remaining twenty-eight shops and the aforesaid agreement of distribution was recorded subsequently in a formal document executed on March 14, 1959; (2) that the twenty-eight shops which were trading assets of the firm were valued at an artificial figure of Rs. 89,000, which amount did not represent the cost as in the case of Sir Kikabhai; (3) the distribution and transfer of these twenty-eight shops effected by the deed of the distribution was not, and could not be said to be, from a party to himself or substantially to the same party, as was respectively the case in Commissioner of Income-tax v. Sir Kikabhai Prem Chand and Commissioner of Income-tax v. Sir Homi Mehta's Executors, relied on by the Appellate Assistant Commissioner and the Tribunal; and (4) that by fixing the book value of the shops for distribution at Rs. 89,000, the books of the assessee-firm showed a surplus of Rs. 4,831 which was carried to the profit and loss account, that the assessee-firm showed that amount as profits and gains of the firm during the year of account and by showing that amount in its return the firm admitted that that amount was a taxable amount. According to the learned Advocate-General, by doing so the assessee-firm treated the transaction in question as a sale or, at any rate, as a commercial transaction and, consequently, the principle laid down in the two decisions relied on by the Tribunal would not apply and could not be extended to the facts in this case. The contention of Mr. Kaji, on the other hand, was that the transaction in question must be a business or a commercial transaction resulting in actual profits which alone could be taxed. He argued that even if there were profits as a result of a transaction but if that transaction was neither a sale nor a business transaction, the profits would not be business profits. He, however, concede that it is not only a sale which attracts liability to assessment, but that even if the transaction were not a sale, but a commercial transaction, the principle laid down in the aforesaid two decisions would not apply. His argument, however, was that the deed of distribution showed that the partners merely distributed the remaining business assets of the firm when they agreed upon discontinuance of the business and that the fact that the entire remaining assets were disposed of by distribution amongst them was an intrinsic evidence indicating that the transaction was not a business or a commercial transaction, much less a sale. These were the rival contentions urged before us.
5. The question on which the case turns is, what precisely was the nature of the transaction and what did the parties do when they entered into that transaction. The mere fact that the partners called the document a deed of distribution is not sufficient, for it is well-settled that what we have to see is its substance and not the form. A perusal of the deed of distribution shows that the transaction, no doubt, was one of distribution of the remaining twenty-eight shops out of the forty shops constructed by the assessee-firm. The deed also shows that for the purpose of distribution of these twenty-eight shops the partners formed themselves into three groups called the parties of the first, second and third parts, the party of the first part being Keshavlal Trikamlal, the party of the second part consisting of Himatlal Lavjibhai, Kantilal Lavjibhai and Chandulal Lavjibhai and the party of the third part being Vardhman Moolji, Virchand Chunilal and Ratilal Maganlal. Clause 3 of the deed recites that the shops were till then managed by the assessee-firm, that the land was purchased from, and the construction of forty shops thereon was made from, the capital of the firm, that the sale proceeds of the twelve out of forty shops were credited in the firm's account and that that account was adjusted and settled after dividing the amount due to the firm amongst the partners. The clause further states that the remaining twenty-eight shops were to be distributed amongst the partners without the partners being liable to pay anything to the firm. Then follows the distribution of the twenty-eight shops, seven to the party of the first part valued at Rs. 22,250 according to his share of 25 naye paise in a rupee, seven shops jointly to the party of the second part according to their aggregate share of 27 naye paise valued at Rs. 24,030 and fourteen shops to the party of the third according to their aggregate share of 48 naye paise in the firm and valued at Rs. 42,720. Clause 9 of the deed, as translated into English, provides : 'The possession of whatever shops which have come as a share to the parties of the first part has been given over to them. Similarly, possession has been given over to the parties of the second and third parts. Therefore, they have become sole owners of these shops and they have absolute right to legally enjoy the shops and dispose (them) of as they like. Nobody or any descendant of anybody has any right or any interest in it.' After the execution of the document, the parties appear to have realised that the valuation of the shops coming to each of the parties as mentioned in the deed did not correspond with their respective shares in the partnership and, therefore, by a post-script altered the valuation of the shops coming to the parties of the second and the third parts to correspond with their shares of 27 naye paise and 48 naye paise respectively instead of 25 naye paise and 50 naye paise, which was done originally, as we have said. The division of the shops in accordance with this deed was carried out in the firm's books of account, the account opened with the debit balance of Rs. 81,529, i.e., Rs. 1,64,000 and odd less Rs. 79,499. As against the debit balance of Rs. 81,529, a credit entry was made for Rs. 89,077, that being the book value fixed by the parties in respect of the shops going to the three groups spilt up as follows :
Rs. 22,250 of the seven shops going to the party of the first part;
Rs. 42,720 of the fourteen shops going to the party of the third part; and
Rs. 24,030 of the seven shops going to the party of the second part, totalling to Rs. 89,000, to which were added Rs. 77 being the sale proceeds of certain materials. After adjusting the balance of Rs. 81,529, and certain other amount, the surplus of Rs. 4,831 remained which had to be accounted for and that amount, therefore, was, as aforesaid, carried to the profit and loss account of that year and was shown as the income of the firm in the firm's income-tax returns for the assessment year 1960-61.
6. Prior to this transaction, the position in law was that these twenty-eight shops were the stock-in-trade or the trading assets of the assessee-firm. None of the partners had, or could claim to have, a specific right in any of these shops, for the only right which they had or which they could claim was their shares in the partnership property and assets. On the distribution of these assets, what the partners did was that they inter se conveyed their right, title and interest in these assets to the party to whose share a particular shop or shops went and, therefore, clause 9 of the deed recited that in respect of the shops which came to the different parties, such parties became the absolute owners of such shops and possession thereof was handed over to them. Accordingly, clause 10 of the deed also recited that 'nobody has any claim or any right or any interest in these premises. If there be any, the parties of 3 parts and their descendants are responsible according to their shares.' Documents of title relating to these shops were to remain under the deed with the party of the third part, but duplicate copies were given to the other parties with the right of inspection of the originals and the right to have them produced in any future proceedings in a court of law. There can, therefore, be no doubt that the effect of the deed of distribution was that : (1) valuation of the shops which came to the respective shares of each of the three groups as a result of the distribution was fixed; (2) the partners inter se conveyed to each other their right, title and interest in those shops to the parties to whose share particular shops went and on such conveyance, the party to whom such particular shops went became the absolute owner, and, lastly, (3) the balance that remained, namely, Rs. 4,831, was carried to the profit and loss account and was shown to be surplus income of the firm after defraying the cost of the shops incurred by the assessee-firm.
7. The question then is, does the principle laid down in the two cases relied upon by the Tribunal apply to this case In Sir Kikabhai's case, the assessee was a dealer in silver and shares and was the sole proprietor of the business. He maintained his accounts according to mercantile system and valued his stock at cost price, both at the beginning and at the end of the year. During the relevant accounting year, he withdrew some silver bars and shares from the business and settled them on certain trusts in which we was the managing trustee. In his books, he credited the business with the cost price of the bars and shares so withdrawn. The case of the revenue was that the assessee derived income from the stock-in-trade thus transferred, and assessed him on the difference between the cost price of the silver bars and shares and their market value at the date of their withdrawal from the business. The Supreme Court held that the revenue was not entitled to do so as the transaction was not a business or a commercial transaction. The ration of the decision was that the withdrawal of a trading asset to a non-trading activity by the assessee, if treated as a business transaction, would amount to a notional sale by the assessee to himself and a notional or a fictional profit arising from such a fictional sale. In the words of Bose J., who spoke for the majority, 'in the present case, disregarding technicalities, it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. Cut away the fiction and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law. And worse. He may kept it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be completed to sell at a profit. But in this purely fictional sale to himself, he is compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional.' At page 510, the learned judge added that the appellant's method of book-keeping reflected the true position. As he made his purchase he entered his stock at the cost price on one side of the accounts. At the close of the year he entered the value of any unsold stock at cost on the other side of the accounts thus cancelling out the entries relating to the same unsold stock earlier in the accounts; and then that was carried forward as the opening balance in the next year's accounts. That cancelling out of the unsold stock from both sides of the accounts left only the transactions on which there had been actual sales and gave the true and actual profit or loss on his year's dealings. In the same way, the appellant had reflected the true state of his finances and given a truthful picture of the profit and loss in his business by entering the bullion and silver at cost when he withdrew them for a purely non-business purpose and utilised them in a transaction which brought him neither income nor profit or gain. There was thus in Sir Kikabhai's case identity of the person who withdrew the trading asset and the person who received it, and it was that identity which caused the Supreme Court to characterise the concept of regarding such a transaction a sale as fictitious and notional, and ascribing profit in such a transaction as making profit out of himself, a concept contrary to all mercantile and income-tax law. It will be observed that the Supreme Court there noted the method employed by the assessee was the cost price method and the entries in the books of account of the assessee, unlike the present case, showed that there was neither any profit nor any loss resulting from the transaction in question. In the case of Sir Homi Mehta's Executors, the principle applied by the High Court of Bombay was the same as the one laid down in Sir Kikabhai's case. In that case, Sir Homi Mehta and his sons formed a private limited company and transferred to that company shares in certain joint stock companies which Sir Homi Mehta had held jointly with his sons for a sum of Rs. 40,97,000 which was the market value of the shares at that time. As these shares had cost Sir Homi Mehta only Rs. 30,45,017 the revenue assessed income-tax on the difference between the market price and the cost price on the footing that the assessees had made a profit to that extent by the transaction in question. The case of the revenue, however, was negatived by Chagla C.J. and Tendolkar J. on the ground that the result of the formation of the private limited company and the sale of the shares to that company was that those very shares, instead of being held by the assessee and his sons jointly in their individual capacity, would henceforth be held by those very same individuals constituted into a limited company. The only result of the transaction therefore was that the assessee and sons held these very shares in a different way from the way they held before the transaction was completed, adopting the mode of forming a limited company with all its advantages in order to hold those shares, to deal with them and to make profit out of those shares. Besides this consideration, the learned judges posed to themselves the question whether it could be said that in forming the limited company and transferring those shares to it the assessee was undertaking any business activities. The answer they gave was in the negative, for, although the shares were the assessee's stock-in-trade, he was not dealing with those shares in the ordinary course of business when he transferred them to the private limited company. At page 934 of the report, the learned judges applied the test of identity, as was done in Sir Kikabhai's case and observed that even assuming 'that the agreement embodies a real sale between Sir Homi Mehta and the limited company, the significant fact remains, and we shall presently point out how great is the significance of that fact, that the sale is by the vendor to himself. As we have pointed out, although it is Sir Homi Mehta and his sons as individuals who are selling these shares, they are selling these shares to themselves constituted as a different legal entity and taking the form of a limited company. It is well established both in English courts and in our own courts that there can be no profit subject to tax when there is a sale by a vendor to himself. A vendor cannot make profit out of himself, and therefore the transaction relied upon by the department is not a transaction which was capable of resulting in any profits. In the first place, it is not a sale; it is merely a transfer of shares by Sir Homi Mehta to the limited company and, in the second place, the transfer is solely for the purpose of bringing about a readjustment of their position as the holder of these shares. Instead of holding these shares and doing business in these shares as individuals with all the consequential liabilities, the readjustment is brought about by which Sir Homi Mehta holds these shares as a shareholder of the limited company along with his sons.' At page 930 the learned judges, again referring to Kikabhai's case observed that in the case before them, there was also an identity between the two entities and that therefore it would be unreal and artificial to treat the two identical entities, that is to say, the assessee and the company, as doing business with each other and by means of a fictional sale producing a fair profit which the income-tax department sought to tax.
8. Looking, therefore, at the substance of the transaction, there can be no doubt that on the partners of the assessee-firm deciding to discontinue the business of construction and sale of the shops, the partners as business men dealing with the business or trading assets belonging to the firm, agreed to distribute them amongst themselves just as partners in any other such firm would do when they decide to discontinue their firm's business. Therefore, it cannot be gainsaid that what the partners did in this case was to enter into a business transaction. The transaction, unlike the one in Sir Kikabhai's case, was not merely withdrawal of a business asset resulting in a loss to that business and transferring it to a non-trading activity, the beneficiary of which was the assessee himself. Unlike the case in Sir Homi Mehta's Executors, the transfer also was not substantially to the same individual. Though there was not actually a dissolution of the partnership in the present case and there is no such finding, the partners were in effect doing precisely what they would do under section 48 of the Partnership Act, dividing the assets of the firm amongst themselves which they until then held jointly and conveying mutually their right, title and interest in each of the shops which went to the respective share of each of the three groups and leaving, as a result of such division and transfer, a surplus of Rs. 4,831 which was carried to the profit and loss account. The transaction was carried through by the partners by fixing a book value on the shops going to the three groups amongst them, which value left as a balance of Rs. 4,831 which had to be carried to the profit and loss account and which had to be shown as taxable surplus over the cost of the shops. In our view, these facts cannot be said to be analogous to the facts in the said two cases. The principle laid down there on the facts of those two cases cannot also be rightly extended to a different set of facts and to a transaction entirely dissimilar from the transactions in those two decisions.
9. It is a well-settled principle that the value of a trading stock held at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is low, in the profit and loss account. That principle, however, was not observed in the present case, for though the debit balance of Rs. 81,000 and odd was entered as being the difference between the cost and the sale proceeds of the previously sold twelve shops, trading assets were withdrawn in the middle of the year and not at the close and an artificial book value was fixed showing as a result of the transaction a surplus of Rs. 4,831 which was carried to and shown as surplus income in the profit and loss account. When partners of a business agree upon its dissolution and decide to take over the assets, the dissolution account must show the actual or the book value of such assets as agreed upon by the partners. This is well illustrated in Pickles' Accountancy, third edition, page 719, where stock and sundry assets were taken over, partner B took the stock at pounds 700 and certain sundry assets at pounds 720, being the book value less ten per cent., and the aggregate of the two, namely, pounds 1,420, was credited as against the debit balance of pounds 5,030. There can, therefore, be no doubt that distribution of assets is part of the transactions of dissolution and is a business transaction entered into by the partners who, until then, were jointly carrying on the business. In our view, what applies to dissolution of a partnership must equally apply to a transaction entered into by business men when they decide to discontinue the business and make up accounts and distribute its assets and liabilities amongst themselves.
10. But then Mr. Kaji argued that the document itself shows that the transaction was not a business transaction but one of the distribution, the partners seeking thereby to distribute the assets amongst themselves as partners. The transaction being one of distribution only and the partners not having gone through it with the intention of making any profit, it could not be regarded as a business transaction. Mr. Kaji sought to rely on Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. as an authority for the proposition that where a sale is a realisation sale, the transaction is not a business or a commercial transaction. What happened in that case was that the assessee-company entered into an agreement for the sale of lands, buildings, plant and machinery of a match factory belonging to it for a sum of Rs. 5,75,000 with a view to close down that business. The purchaser made default in payment and, thereupon, a fresh agreement was entered into between the parties for the sale of the properties mentioned in the first agreement and also chemicals and paper used for manufacture which had not been included in the first agreement for the sum of Rs. 7,35,000. As the memorandum of association of the assessee-company allowed the assessee to manufacture and sell chemicals, and even after the sale the company carried on manufacture on behalf of the purchaser, the department sought to assess the profit derived from the sale of the chemicals and paper, namely, Rs. 1,15,259, as profits from business. It was contended by the assessee that that was a realisation sale and therefore the amount of Rs. 1,15,259 was not liable to tax. The Supreme Court held that it was a realisation sale and therefore the amount of Rs. 1,15,259 was not taxable. The question, however, in that case was not one which we are concerned with, namely, whether the transaction was a business transaction. The question there was whether the sale of raw materials along with the business, including machinery, plant and premises was a revenue sale and whether on the facts of the case the sum of Rs. 1,15,259 was rightly brought to tax. What the Supreme Court held was that the revenue authorities were not entitled to tax that amount as the transaction was a sale of the concern as a going concern, that is to say, the sale of capital assets and not a sale in the course of business operations which alone would attract tax. In Commissioner of Income-tax v. Express Newspapers Ltd. another decision relied upon by Mr. Kaji, the same principle was again laid down. But, as aforesaid, that is not the question before us, for it has never been challenged either before us or before any of the authorities that the surplus amount of Rs. 4,831 was not taxable on the ground that the transaction resulting in that surplus was a realisation sale. There is a certain amount of misapprehension in the contention in that it mixes up the question as to whether a transaction is a business transaction with the question as to whether a transaction is one in the course of business. The two concepts are different, for in order that a transaction is a business or a commercial transaction, it does not necessarily have to be a transaction during the course of business. The expression 'business transaction' is not to be understood in any technical sense. It is a generic expression used in the sense that it is a transaction which a business man, in a commercial or business sense, would enter into. The two decisions thus were concerned with a different question arising under section 10 and cannot assist Mr. Kaji.
11. Mr. Kaji next sought to show that the surplus of Rs. 4,831 shown by the parties in the account of the firm was an error on their part and that in fact the transaction relating to the shops as a whole ended in a loss. He argued that it was an error on the part of the parties to take the figure of Rs. 1,64,000 and odd as cost of the forty shops and deduct therefrom Rs. 79,499 which were the sale proceeds of twelve shops sold in Samvat year 2014 and arrive at the figure of Rs. 89,000 and odd as the debit balance. According to him, the correct fact was that the sum of Rs. 79,499 contained profits of Rs. 10,000 in respect of the sale of the said twelve shops and that, therefore, what the partners ought to have done was to deduct only Rs. 69,000 and odd from Rs. 1,64,000. He pointed out that if that were done, the transaction would have shown a loss and not a surplus of Rs. 4,831. But then, such a case was never made out before any of the authorities and that is not even the question before us. All along, the parties have gone on the admitted footing that the transaction resulted in a surplus of Rs. 4,831 and the accounts show that that amount being the surplus was carried to the profit and loss account. In any event, even if Mr. Kaji were to be right, that would not make any difference, for the fact that a transaction results in a loss does not take it out from the category of business transactions. Unlike the cases of Sir Kikabhai and Sir Homi Mehta's Executors, all the partners, while discontinuing the particular activity of dealing in shops which the firm had constructed but not at the same time dissolving the firm, decided to divide the assets, fixing the value of the shops at a price other than the cost. The only difference was that instead of selling the shops to outsiders, the partners thought it expedient to dispose them of amongst themselves. But the fact is that there was not that identity which was the main feature in the cases of Sir Kikabhai and Sir Homi Mehta's Executors which brought in the principle that a person cannot trade with himself and make profits from himself. In our view, the transaction was a business transaction often resorted to in a commercial sense by parties while discontinuing the business or while dissolving a partnership.
12. On the footing that the transaction was a business transaction, the next question would be whether the revenue could substitute its own value of the twenty-eight shops and assess profits resulting from such valuation. The learned Advocate-General argued that the revenue can. But we think that he is not right. Where a person disposes of his goods at a lesser value than their market price, or at a concessional price, there is nothing in the income-tax law which compels him to sell at a price which is the price realisable in the market. The partners in the present case agreed amongst themselves that it would be more expedient to dispose of the shops amongst themselves rather than to outsiders and that they should do so at a book value agreed between themselves which was less than the market value. In such a case, if the taxing authorities were to substitute the market value, then that would amount to bringing in surplus which was not there but a notional and unreal surplus. That, in our view, is not permissible and would be contrary to the realities of the transaction. We may observe that it has not been the case of the revenue authorities that the transaction was not a bona fide transaction or that the transaction was a sham one or that the price paid was other than the one set out in the deed of distribution. If any authority on this proposition is needed, it is to be found in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax. In that case, the account books of the assessee, a limited company, showed that some of its goods were sold to its managing agency firm, to one of its directors, and to a firm in which one of the directors was a partner, at prices much lower than the market price. The income-tax authorities, finding that the sales to these persons at lower prices were not bona fide sales and were effected to benefit the purchasers at the expense of the company, included the difference between the price for which those goods were sold and their market price at the date on which the goods were sold, as profits of the company in its assessment. The High Court of Madras held that the sales could not be regarded as sham transactions unless there was sufficient evidence to prove that; and if they were sham transactions the sales had to be ignored and the company could be assessed only on the profits, if any, made by the benami purchasers when they sold the goods. It was also held that in the absence of evidence to show either that the sales were sham transactions or that the market prices were in fact paid by the purchasers, the fact that goods were sold at a concessional rate to benefit the purchasers at the expense of the company would not entitle the income-tax department to assess the difference between the market price and the price paid by the purchasers, as profits of the company. The principle laid down in this case was approved of in Das & Co. v. Commissioner of Income-tax by the Patna High Court. The learned Advocate-General, however, argued that the Madras decision cannot apply to the present case because no price was actually paid but that the mode employed in dealing with the shops was by adjustment of accounts at a certain book value fixed by the partners. That, in our view, makes no difference, for that is another way of disposal of assets and therefore whether the shops were sold at a price agreed between the parties or were taken over the partners at a value fixed by them makes no difference. In that view, we hold that the taxing authorities have no right to substitute the market price in place of the price or value agreed to between the parties to a transaction, unless the transaction has been shown to be a sham one or unless the price paid or the value shown was not the value in the books of account.
13. These are the two aspects arising from the present controversy. In order to bring them out properly, the Commissioner had applied to the Tribunal to frame two questions suggested by him for reference to this court. The Tribunal, however, did not agree, thinking that the question referred to in this reference covered both the aspects of the case. Thereupon, the Commissioner made an application under section 66(2). We adjourned that application to the hearing of this reference, for we thought that by reframing the question it was possible to deal with both the aspects instead of calling for a further statement of the case, and that is the course which we propose to adopt, for the question referred to us by the Tribunal does not properly bring out the two points in controversy between the parties. The question, therefore, requires reframing. The question so reframed would fall into two parts and would read as follows :
'(1) Whether, on the facts and in the circumstances of the case, the distribution of the shops in specie amongst the partners by the assessee-firm amounted to a business transaction in respect of the aforesaid twenty-eight shops by the assessee-firm
(2) If so, whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the said twenty-eight shops which were taken over by its partners at the time of the discontinuance of the firm's business should be valued at the book figure of Rs. 89,000 and not at Rs. 1,70,000, being their then market price ?'
14. Our answer to the first question is in the affirmative and our answer to the second question is also in the affirmative. The Commissioner will pay to the assessee-firm the costs of this reference.
15. No order on the application. No order as to costs.
16. Questions answered in the affirmative.