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R.M. Veerabhadra thevar Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 206 of 1966 (Reference No. 53 of 1966)
Judge
Reported in[1973]92ITR357(Mad)
ActsIncome Tax Act, 1922 - Sections 10(2); Taxation Laws (Extension to Merged States and Amendment) Act, 1949 - Sections 11
AppellantR.M. Veerabhadra thevar
RespondentCommissioner of Income-tax
Appellant AdvocateS. Padmanabhan and ;S.V. Subramaniam, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredPandit Lakshmikanta Jha v. Commissioner of Income
Excerpt:
.....act, 1949 - assessee was involved in transport business - while filing return for assessment year assessee included certain sum from income of first two days of next assessment year - whether assessment of aforesaid sum as income from business valid in law - held, sum included in business income justified as assessee carried on business for part of previous year and had not piled buses on two days of next assessment year. (ii) sale - whether sum arrived at by sale contemplated under section 10 (2) (vii) assessable to tax under second proviso to section 10 (2) (vii) - if during entire previous year or part of year business carried on by assessee and building machinery or plant used in business excess over written value liable to tax by virtue to second proviso to section 10 (2)..........of rs. 58,066 had been sold to the company for rs. 1,37,186 and the assessee got shares towards sale consideration and they represented the enhanced value of the assessee's properties. these observations of the tribunal, in our view, were only with respect to the argument that the sale was not for cash consideration. we, therefore, proceed to consider the question argued by the learned counsel for the assessee. 9. in order to satisfy the provisions of the second proviso to section 10(2)(vii) of the act, there must be a sale of the machinery or plant and the price for which they were sold must exceed the amount of the written down value of the same. sale is a transfer of ownership for a price paid or promised or partly paid and partly promised. price is a money consideration for the.....
Judgment:

Ramaswami, J.

1. The following two questions have been referred under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee :

'1. Whether the assessment of Rs. 223 as income from business is valid in law

2. Whether the sum of Rs. 80,530 is assessable to tax under the provisions of the second proviso to Section 10(2)(vii) of the Income-tax Act, 1922?'

2. The assessee was carrying on transport business as a sole proprietor. On 3rd of April, 1959, a private limited company in the name of Swathanthiram Transports Private Ltd. was incorporated. The share capital of the company was 600 shares of Rs. 100 each. The assessee transferred to this company his entire transport business. The entries relating to effecting this transfer was made in the books of the assessee on April 2, 1959. The written down value of the motor vehicles was Rs. 58,066, These weretransferred to the company for a sum of Rs. 1,37,186. Similarly, a car whose written down value was Rs. 6,720 was transferred for a sum of Rs. 7,500. Some tyres and tubes were taken over by the company for a sum of Rs. 6,105. The accounts also showed that electric goods valued at Rs. 281 and stationery valued at Rs. 300 were also taken over by the company along with tools and machinery which were valued at Rs. 7,500. The total amount which was entered in the accounts of the assessee amounted to Rs. 1,60,606. Out of 600 shares of Rs. 100 each, the company allotted 575 shares to the assessee and 25 shares to his wife. After debiting the value of the shares allotted to the assessee, for the balance of the consideration the assessee was shown as a creditor in the books of the company.

3. For the assessment year 1959-60, corresponding to the previous year ending March 31, 1959, the assessee filed a return showing an income of Rs. 20,157. Though the accounting period ended on March 31, 1959, in the return he included the income from his transport business for the period from April 1, 1958, to April 2, 1959. It appears that the assessse showed an income of Rs. 25,029 in a revised return for the same period from April 1, 1958, to April 2, 1959. The Income-tax Officer took the view that the assessee had sold away all his buses for a sum of Rs. 1,37,186 and the car for a sum of Rs. 7,500 to the newly formed company on April 2, 1959, and after deducting the written down value he held that a sum of Rs. 60,396 is liable to be assessed as profit on sale under Section 10(2)(vii) of the Income-tax Act, 1922 (hereinafter called 'the Act'). This was confirmed in appeal by the Appellate Assistant Commissioner. Before the Tribunal the assessee contended that the transfer of the vehicles to the private limited company was not a sale in the commercial sense as contemplated under Section 10(2)(vii). The Tribunal took the view that no sale took place in the previous year ending March 31, 1959, the vendee-company having been incorporated only on April 3, 1959, and the company was not in existence during the previous year. In that view, it deleted the addition of Rs. 60,396 and the Income-tax Officer was directed to consider the assessability of the same in the previous year relevant to the assessment year 1960-61. This order was made by the Appellate Tribunal on November 2, 1963.

4. In the meanwhile, the assessment for 1960-61 had been completed on March 28, 1962, on an income of Rs. 15,521 representing the salary of the assessee as managing director of the company and his property income. The Income-tax Officer therefore initiated proceedings under Section 147 of the Income-tax Act, 1961. In response to this notice the assessee filed a return showing the income as in the original return. The assessee was asked to file his objections to the assessment of the profit on the sale of thevehicles under Section 1.0(2)(vii) of the Act. The assessee contended that there was no justification for the reopening of the assessment, that the assessee had not carried on any business during the previous year and that there was no sale as contemplated under Section 10(2)(vii). The Income-tax Officer held that there was nothing illegal in the reopening of the assessment, that the assessee had in fact carried on business for a part pf the previous year ending March 31, 1960, that the income of the business on the two days, 1st and 2nd April, 1959, was Rs. 223, that there was a sale as contemplated under Section 10(2)(vii) and that the profit under that section was Rs. 80,530. It may be mentioned that the sum of Rs. 80,530 was arrived at as against the sum of Rs. 60,396 computed by the Income-tax Officer on the previous occasion on account of the disallowance of certain depreciation. Before the Appellate Assistant Commissioner the assessee contended that he was not carrying on any business during any part of the previous year and that unless a business was carried on in the previous year or in any part of the year the profit under Section 10(2)(vii) could not be assessed. He also contended that there was no sale, that it was only a transfer and that in any case it was not a sale in the commercial sense of the term. The Appellate Assistant Commissioner held that the assessee in fact carried on business for two days in the previous year, that there was money consideration for the transfer of the vehicles and that, therefore, there was a sale and not a mere transfer. In that view, he confirmed the order of the Income-tax Officer.

5. In the appeal before the Tribunal, the assessee contended that he did not carry on any business during any part of the previous year and that the transfer to the private limited company did not constitute a sale as contemplated under Section 10(2)(vii) on the ground that there was a substantial identity between the vendor and the vendee-company and that the transfer amounted only to a change in the mode of enjoyment of the business. The Tribunal held that the assessee had plied the buses on 1st and 2nd April, 1969, that the assessee carried on the business for part of the previous year ending March 31, 1960, that he had not asked for any change in the previous year for the assessment year 1959-60 and that, therefore, the sum of Rs. 223 included in the business income for 1960-61 was justified. The Tribunal also held that the company is a different entity from the assessee, that there was no identity between the vendor and the vendee and that there was a sale as contemplated under Section 10(2)(vii) and the profits are, therefore, liable to be assessed. For this view, the Tribunal referred to and followed the decision in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, : [1963]48ITR483(Patna) . At the instance of the assessee the above questions have been referred to this court.

6. In this reference, the learned counsel for the assessee contended that the transfer of the vehicles to the private limited company was not a sale contemplated under the second proviso to Section 10(2)(vii). In order to attract the provisions of this section:--(1) there must be a sale in the commercial sense; (2) the sale must be for money consideration ; and (3) the sale must relate to a machinery or plant.

7. In the present case, according to the learned counsel for the assessee, there was a substantial identity between the vendor and the vendee-company and, therefore, there was no sale in the commercial sense and that the Tribunal and the authorities below overruled this contention holding that the seller was the assessee and the purchaser was a limited company, a different entity. There was a divergence of opinion on the question whether the transaction in such circumstances would amount to a sale, some decisions taking the view that the substance of the transaction will have to be taken into account in determining the character of the transaction, and the other line of decisions taking the view that the legal effect or the character of the transaction and not the substance of the transaction was relevant. The Supreme Court had set the matter at rest by approving the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax. In that case the assessee who was carrying on publication of some newspaper floated a private, limited company for the purpose of carrying on his business and sold to the company the said business as a going concern for a sum of Rs. 12,50,000 which was received by the assessee in the shape of 12,500 fully paid up shares of Rs. 100 each. Of the 25,000 shares in the company all but the 50 shares were held by the assessee and the remaining 50 shares were held by his nominees. With respect to the assessability of the difference between the written down value and the amount for which the building, plant and machinery were transferred under the second proviso to Section 10(2)(vii) of the Act, it was contended on behalf of the assessee that, since he practically owned all the shares of the limited company, there was no material difference between the vendor and the vendee and the transaction was not in reality a sale. It was further submitted that regard must be had to the substance of the transaction and not to the form in which the transaction was effected. The Patna High Court held that the private limited company is in law a legal entity entirely distinct from its shareholders, that the assessee and the company were distinct legal entities and that the profit in question was rightly assessed to tax as income in the hands of the assessee under Section 10(2)(vii) of the Act. This decision was approved by the Supreme Court in Pandit Lakshmikanta Jha v. Commissioner of Income-tax, : [1970]75ITR790(SC) . This decision concludes this point.

8. The learned counsel for the assessee submitted that in the present case the transfer was not for money consideration but for allotment of shares, that even the money portion of the consideration was not paid in cash but only a credit entry was made in the books of account of the company, and that, therefore, it was not a case of sale but it was an exchange. The learned counsel for the revenue objected to the raising of this contention and stated that only two points were argued before the Tribunal and that did not include the point now raised. It is true that the argument before the Tribunal was mainly concentrated on the question whether the assessee was carrying on any business during any part of the previous year and whether in view of the substantial identity of the parties there was any Teal sale in the commercial sense. Though the assessee did not specifically state that the transaction was an exchange, he contended before the Appellate Assistant Commissioner that there was only a transfer and no cash consideration passed. The Appellate Assistant Commissioner considered this point and held that there was money consideration for the transfer of the vehicles and that, therefore, there was a sale. The Tribunal stated that the assessee submitted before it that there was no sale as contemplated under Section 10(2)(vii), that there was a substantial identity between the vendor and the vendee-company and that by the transfer only the mode of enjoyment of the business had been altered. Towards the end of its order, the Tribunal further stated that the vehicles which had depreciated to the value of Rs. 58,066 had been sold to the company for Rs. 1,37,186 and the assessee got shares towards sale consideration and they represented the enhanced value of the assessee's properties. These observations of the Tribunal, in our view, were only with respect to the argument that the sale was not for cash consideration. We, therefore, proceed to consider the question argued by the learned counsel for the assessee.

9. In order to satisfy the provisions of the second proviso to Section 10(2)(vii) of the Act, there must be a sale of the machinery or plant and the price for which they were sold must exceed the amount of the written down value of the same. Sale is a transfer of ownership for a price paid or promised or partly paid and partly promised. Price is a money consideration for the sale. In an exchange there is only a reciprocal transfer of the ownership. As regards the test to be applied in determining the nature of these types of transactions, the Supreme Court pointed out in Commissioner of Income-tax v. R. R. Ramakrishna Pillai, : [1967]66ITR725(SC) that:

'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 onthe 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 are in 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.'

10. It is seen from the minutes books of the company that in the meeting held on November 25, 1959, the transaction was discussed by the company and the discussion related as to how to repay the amount due to the assessee for the assets purchased from him. It was decided that the amount payable to the assessee was Rs. 1,60,606, It was further decided that this consideration will have to be paid by allotment of shares worth Rs. 50,000 and the balance to be paid within three years with interest. The Tribunal, as already stated, also observed that the vehicles were sold to the company and the assessee got the shares 'towards' the sale consideration. Clearly, therefore, the transfer Was for cash consideration and the company, in satisfaction of the liability to pay that money consideration, allotted certain shares to the. assessee and treated him as creditor of the company for the balance. The contention of the learned counsel for the assessee that because even the money portion of the consideration was not paid but only a credit entry was made in the books of accounts of the company no portion of the consideration was paid in cash is untenable. In order to constitute a sale, the transfer of ownership need not be for the price paid. Even the promise of payment of the price will make the transaction a sale. Surely, in default of payment of the money in respect of which a credit entry was made in the books of accounts of the company, the assessee will be entitled to recover the same through court. We are, therefore, unable to accept the contention of the assessee that the transaction in this case was not for money consideration.

11. The further submission of the learned counsel for the assessee was that, even assuming that there was a sale, the sale was of the entire business and it amounted to a realisation sale and not a sale of the machinery and plant and, therefore, Section 10(2)(vii) is not attracted. In this connection he relied on the decisions in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd., : [1962]46ITR135(SC) and Commissioner of Income-tax v. Mugneeram Bangur & Company, : [1965]57ITR299(SC) The decision in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. related to a case of sale of building, plant and machinery of a factory with a view to close down that business. The agreement of sale was executed on May 9, 1943. On default of payment of the price, a fresh agreement was entered into on August 9 for an enhanced consideration. The question for consideration was whether the difference in sale price and the written down value has been rightly charged to income-tax. The assessment year was 1944-45. At the relevant date Section 10(2)(vii) did not include the words 'whether during the continuance of the business or after the cessation thereof'. Having regard to the provision as it stood then, the Supreme Court held that a realisation sale or a winding-up sale would not attract liability to tax under Section 10(2)(vii). The decision in Commissioner of Income-tax v. Mugneeram Bangur & Co. was also concerned with a case prior to the amendment of Section 10(2)(vii). The section was amended by Act 67 of 1949, inserting the words 'whether during the continuance of the business or after the cessation thereof' in the second proviso to Section 10(2)(vii). The amendment has made it clear that the liability to a balancing charge would arise even if the plant and machinery were not used at all in the accounting year in which it was sold or the business was not in existence in that accounting year or the sale was for the purpose of closing down or winding up of the business. The Supreme Court also had occasion to consider the decision in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. and the effect of the amendment in Commissioner of Income-tax v. B. M. Kharwar, : [1969]72ITR603(SC) and observed :

'This court held in Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. that where business is sold as a going concern and the sale of the assets is a realisation sale, the difference between the written down value and the price attributable to the assets which were admitted to depreciation is not taxable under Section 10(2)(vii), proviso (ii), as it stood enacted before it was amended by Act 67 of 1949. In the present case the Tribunal has recorded no finding that the transfer was ' a realisation sale' or in the course of winding up of the business. The observations made by the revenue authorities suggest that only the manufacturing side of the business was closed and not the business of purchasing and selling the cloth. The High Court observed that it was not possible to say that the entire business carried on by the firm at Surat, namely, the manufacturing of art silk cloth and sale thereof, was not taken over by the company. We do not propose to express any opinion on the correctness of that view, for, in our judgment, by virtue of the amendment made in Section 10(2)(vii), proviso (ii), of the Indian Income-tax Act, 1922, by Section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 (67 of 1949), even under a 'realisation sale' excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax.'

12. Whether the assessee was carrying on any business on the 1st and 2nd April, 1959--the finding of the Tribunal on this aspect is that he was carrying on the business on 1st and 2nd April--is also not of great moment in view of the amendment made to Section 10(2)(vii) by Act 67 of 1949. On this part of the question, the Supreme Court observed in Commissioner of Income-tax v. B. M. Kharwar at page 610 :

'In Commissioner of Income-tax v. Ajax Products Ltd., : [1965]55ITR741(SC) this court observed that under the Act before it was amended by Act 67 of 1949, three conditions had to be satisfied : (i) during the entire previous year or a part thereof, the business should have been carried on by the assessee; (ii) the building, machinery or plant should have been used in the business ; and (iii) the building, machinery or plant should have been sold when the business was being carried on and not for the purpose of closing it down or winding it up; but by the insertion of the words 'whether during the continuance of the business or after the cessation thereof' in the proviso by the amendment of 1949, the third condition for the exigibility of the excess to tax was removed. The court observed that, if during the entire previous year or a part thereof, the business was carried on by the assessee and the building, machinery or plant was used in the business, the excess over the written down value was liable to tax by virtue of the second proviso to Section 10(2)(vii), even though the sale took place in the year of account after the closure of the business. If, since the amendment of the proviso, liability to pay tax on the excess over the written down value arises, whether the sale of building, machinery or plant is before or after the closure of the business, it would be illogical to say that the excess is not taxable if the sale is for the closing down or in the course of the winding up of the business. The plea that the sale was in the course of realisation of assets of the business and on that account the excess over the written down value was not taxable cannot be accepted.'

13. For the foregoing reasons, we hold that the sum of Rs. 80,530 is assessable under the provisions of the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922.

14. In the return for the year ending March 31, 1959, the assessee included a sum of Rs. 223 referable to income from the business on 1st and 2nd April, 1959. The assessee had not asked for any change in the previous year. The Tribunal has found as a fact that the assessee carried on business for a part of the previous year ending March 31, 1960, that the assessee had plied buses on 1st and 2nd April, 1959, and, therefore, the income of Rs. 223 was assessable as income from business in the assessment year 1960-61, We are of the view that this decision of the Tribunal is correct.

15. Accordingly, we answer both the questions referred in the affirmative and against the assessee with costs. Counsel's fee Rs. 250.


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