Commissioner of Income Tax Vs.
Mugneeram Bangur & Co  INSC 89 (31 March 1965)
31/03/1965 SIKRI, S.M.
CITATION: 1966 AIR 50 1965 SCR (3) 611
CITATOR INFO :
C 1967 SC1475 (5)
Income-tax Act (11 of 1922)--Sale of going
price --When part attributable to
The business of the assessee firm, carrying
on land development business was sold as a going concern to a company promoted
by the assessee s partners. The purchase price included sums for the value of
land, goodwill, etc.
The amount shown as the value of the goodwill
v:as sought to be assessed to income-tax on the grounds (i) that the assessee's
business was purely one of buying and selling land and (ii) the amount was
profit attributable to the sale of land which was the stock-in-trade of the
assessee. In appeal to this Court.
HELD: On the facts of this case it could not
be said that the assessees were carrying on the business of purely buying and
selling land. They were engaged in buying land, developing it and then selling
it. The sale was the sale of the whole concern and no part of the slump price
was attributable to the cost of the land. If that was so, no part of it was
taxable. [617H-618A, E] Commissioner of Income-tax, Kerala v. West Coast
Chemical and Industries Ltd. 46 I T.R. 135 and Doughty v. Commissioner of Taxes
(1927) A.C. 327, applied.
In the case of a concern carrying on the
business of buying land, developing it and the selling it is easy to distinguish
a realisation sale from an ordinary sale, and it is very difficult to attribute
part of the slump price to the cost of land sold in the realisation sale. The
mere fact that in the schedule the price of land was stated did not lead to the
conclusion that part of the slump price was necessarily attributable to the
land sold. There was no evidence that any attempt was made to evaluate the land
on the date of sale. As the assessees were transferring the concern to a
company. constituted by the assessees themselves, no effort would ordinarily
have been made to evaluate the land as on the date of sale. [618B-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 310 of 1964.
Appeal by special leave from the judgment and
order dated December 1'3, 1961 of the Calcutta High Court in Income-tax
Reference No. 74 of 1956.
N.D. Karkhanis, Gopal Singh and R.N.
Sachthey, for the appellant.
A.V. Viswanatha Sastrt, S. Murthy and B, P.
Maheshwari, for the respondent.
The Judgment of the Court was delivered by
Sikri, J. This is an appeal by special leave directed the judgment of the High
Court at Calcutta in a reference under 612 s. 66 of the Income Tax Act. The
four questions referred to the High Court by the Income Tax Appellate Tribunal
"(1) Whether on the facts and
circumstances of this case the Income-tax Officer, Central Circle XIV,
Calcutta, was competent to file the appeal before the Tribunal against the
order of the Appellate Assistant Commissioner of Income Tax, Range-A. Calcutta?
(2) Whether on the facts and circumstances of this case the sum of Rs. 2,50,000
represented the surplus on the sale of lands which was the stock in trade of
the assessee company or was the value of goodwill alleged to have been
transferred? (3) Whether on the facts and circumstances of this case by the
sale of the whole business concern it could be held that there was taxable
profit in the sum of Rs. 2.50,000? (4) Whether on the facts and circumstances
of this case and in view of the findings of the Tribunal that the entire share capital
of the vendee company (excepting seven ordinary shares) was taken over by the
vendor firm in lieu of the sale price of the business as a whole, there was any
profit in the amount of Rs. 2,50,000 the same being taxable under the Indian
Income Tax Act? The relevant facts and circumstances are these. The respondent,
M/s Mugneeram Bangur & Co. (Land Department) Calcutta (hereinafter referred
to as the vendors) were a firm carrying on the business of land development in
Calcutta. By an agreement dated July 7, 1948, the partners of the firm agreed
to sell all the business of the said firm to the Amalgamated Development
Limited, here in after called the vendee, which company was promoted by the
partners of the firm. The relevant paragraphs of the said agreement are as
"And Whereas the Vendors have agreed to
sell and the company has agreed to purchase all the said business on the basis
hereinafter set out.
Now it is hereby agreed and declared between
the parties as follows:--
1. The Vendors do hereby agree to sell and
the company both hereby agree to purchase All That the said business with
effect from the eighth day of July One thousand nine hundred and forty-eight.
Together with the goodwill of the said business and all stock in trade,
fixtures. tools, implements. furniture, fittings and all other articles and
things belonging to the said business or in any way used in the same including
the benefit and advantages of all contracts.
2. The purchase price shall be Rupees
thirty-four lakhs ninty-nine thousand and three hundred paid and satisfied by
the Company allotting to the Vendors or their nominees seventeen thousand five
hundred Redeemable Preference shares of Rupees one hundred each and seventeen
thousand four hundred and ninety three Ordinary s hares of Rupees one hundred
each in the capital of the Company which will be accepted by the Vendors in
full satisfaction of the said purchase price.
3. The Company shall undertake and discharge
all debts and liabilities of the Vendors including development expenses such as
opening out roads, laying out drains and sanitary arrangements providing
electricity in the areas and providing a School in Tolly gunge for education of
Children for which the Vendors have given an undertaking to the Tollygunge Municipality
and also the liability of the Vendors in respect of the deposits made with them
by various intending purchasers of lands but excluding the liabilities of the
Vendors for Income-tax, Super-tax or any other tax or duty on income or revenue
in respect of the profits of the business".
The sum of Rs. 34,99,300 was arrived at in
the Schedule thus:
1. Laud ........ 12,68,628 7 7
2. Goodwill . ........... 2,50,000 0 0
3. Motor Car & Lorries .......... 25,866
4. Furniture, Fixture etc ........... 5,244 5
5. Mortgage secured .......... 71,62,367 6 0
6. Deposits for purchase of land ........
53,500 0 0
7. Advance paid to pleaders solicitors,
contractors' staff and other outstanding ............ 1,83,622 3 6
8. Cash in Bank ............ 71,800 1 8
---------------- 36,21,029 0 9 Less liabilities .. 1,21,729 0 9
------------------ 34,99,300 0 0 614 The consideration of Rs. 34,99,300 was
paid by allotment of 17,500 Redeemable Preference shares of Rs. 100 each and
17,493 Ordinary shares of Rs. 100 each, the allotment being to the
vendors-partners or their nominees. Thus the vendors received shares of the
face value of Rs. 34,99,300 for the assets transferred to the company.
The Income Tax Officer held that the sum of
Rs. 2,50,000 was actually charged by the vendors as a lump sum amount of
profits on sale of valuable stock in trade and not goodwill as alleged. The
Appellate Assistant Commissioner, on appeal, held that the said sum of Rs.
2,50,000 was the value of the goodwill. He further held that since the transfer
was a transfer of business as a going concern, the profit was the capital gain
and therefore not liable to tax. Relying on Doughty v. Commissioner of
Taxes,(1) he held that as "the transfer is a transfer of all assets of the
firm to a company the transfer is a capital sales".
The Income Tax Officer filed an appeal before
the Appellate Tribunal. The Appellate Tribunal held that although the sale was
the sale of a business as a going concern, the value of the stock could be
traced, and, therefore, the profits arising out of the sale was taxable income.
Regarding the goodwill, the Tribunal observed:
"We do not think that there was much
value of the goodwill of the business that was transferred. Mugneeram Bangur
& Co. was a firm constituting of several partners and Mugneeram Bangur
& Co. Land Department was a separate firm consisting of the same partners
with. however. different shares in the firm Mugneerarn Bangur & Co. were
also carrying on business in lands and buildings along with its activities in
Our attention was drawn by the Department
Representative to the fact that in the case of transfer of lands and buildings
of the assessee firm the conveyances were as a rule executed in the name of
Mugneeram Bangur & Co.
The assessee's learned Counsel did not object
to this fact. We are therefore accepting it as correct. If so, there was
nothing in the name of Mugneerarm Bangur & Co. Land Department.
The conversion of the said firm into a
Company in an entirely different name would also indicate that not much of
importance was attached to the name of Mugneeram Bangur & Co.
Land Department. In the circumstances. in our
opinion, the price paid by the purchase Core Dany was not on the consideration
of the goodwill of the  A.C. 327.
615 vendors but upon taking over the entire
going concern and paying the consideration not in money but by allotment of
shares. In such circumstances, the surplus was out of the sale of the business
as a whole, including the stock in trade of the assessee firm. Since the other
assets transferred had definite value which would not increase in value by the
process of transfer, the only value that could increase was the value of the
stock in hand, that being the land in the present case. In our opinion,
therefore, the amount of Rs.
2,50,000 was really the excess value of the
lands sold along with the other assets".
But the Tribunal dismissed the appeal on the
ground that although the vendors were a different entity from the vendee, the
first being a partnership and the second being a limited company, the
transaction was mere adjustment of the business position of the partners. It
further observed that the Income Tax Department was not entitled to take mere
book-keeping entries as the evidence of any profit in the matter.
The High Court first answered question No. 4,
"There was no profit in the transaction
by which the entire stock in trade and the business of the firm were
transferred to the limited company. Again the fact that two outsiders were
brought in as directors with seven shares allotted to them out of 39,300 shares
' makes no difference. In Sir Homi Mehta's case 400 shares out of 6,000 shares
were allotted to Sir Homi Mehta's sons. Nor again can I see any difference in
principle between the case of conversion of business into a private limited
company and one in which it is converted into a public limited company if in
the latter company outsiders are not allotted any sizeable proportion of the
The High Court felt that this answer was
enough to dispose of the matter, but as questions 2 and 3 had been referred,
they answered them. Regarding question No. 2, the High Court held that "as
the assets of the firm transferred to the company have been itemised and as there
can be no question of variation of the figures given in items 3 to 8 in the
agreement for sale, it must be held that Rs. 2,50,000 shown as the value of the
goodwill must be represented by surplus on the sale of lands which was the
stock-in-trade of the assessee company". Regarding question No. 3, the
High Court held that even if the value of the stock in trade taken over by the
assessee was greater than the figure shown therefore in the agreement for sale
in view of the answer to question 4, there was no profit which could be taxed.
616 We may mention that it is not necessary
to deal with question No. 1 because it was given up before the High Court. Mr.
Karkhanis, learned counsel for the appellant.
urges that the Doughty's case(1) was wrongly
decided in one respect and that the 'vendors and the vendee being different
entities. it is not permissible to tear the corporate veil to see whether the
partners of the vendors were the same persons as the shareholders of the
vendee. He says that if the veil is not torn, then there was a sale by the
vendors to the vendee and profits arose out of the sale.
Learned counsel for the respondent, Mr.
Viswanatha Sastri, says that if the third question is answered in his favour,
it would not be necessary to deal with the other questions.
As we are inclined to answer the third
question in the favour of the vendors, it is not necessary to deal with the
other questions and the arguments addressed in respect of them.
The Appellate Tribunal held in this case that
the sale was a sale of business as a going concern. This is also apparent from
clause 1 of the agreement set out above. If this is so Doughty's case(1)
applies. The facts in Doughty's case may be conveniently taken from the head note
in that case. "In 1920, two partners carrying on business in New Zealand
as general merchants and drapers sold the partnership business to a limited
company in which they became the only shareholders. The sale was of the entire
assets, including goodwill, the consideration being fully paid shares, and an
agreement by the company to discharge all the liabilities. The nominal value of
the shares being more than the sum to the credit of the capital account of the
partnership. in its last balance sheet, a new balance sheet was prepared showing
a larger value for the stock in trade. The Commissioner of Taxes treated the
increase in value so shown as a profit on the sale of the stock in trade, and
assessed the appellant upon it for income tax under the Land and Income Tax
Act, 1916, of New Zealand,.
which imposes the tax on all profits or gains
derived from any business".
The Privy Council decided the case in favour
of the appellant on two grounds, the first being that "if the transaction
is to be treated as a sale, there was no separate sale of the stock. and no
valuation of the stock as an item forming part of the aggregate which was
sold". In connection with this ground, Lord Phillimore observed that
"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 with
the price given for the business, or at which it stands in the books does not
give rise to as profit taxable to income-tax". He further observed that
"where. however, the business consists, as in the present case, entirely
in buying and selling, it is more difficult to distinguish between an ordinary
and a realization sale the 617 object in either case being to dispose of goods
at a higher price than that given for them, and thus to make a profit out of
the business. The fact that large blocks of stock are sold does not render the
profit obtained anything different in kind from the profit obtained by a series
of gradual and smaller saks. This might even be the case if the whole stock was
sold out in one sale. Even in the case of a realization sale, if there were an
item which could be traced as representing the stock sold, the profit obtained
by that sale, though made m conjunction with a sale of the whole concern, might
conceivably be treated as taxable income". Lord Phillimore concluded with
the following observations:
"If a business be one of purely buying
and selling. like the present, a profit made by the sale of the whole of the
stock, if it stood by itself, might well be assessable to income tax; but their
view of the facts (if it be open to them to consider the facts) is the same as
that of Stout C.J.--that is, that this was a slump transaction".
This Court. in Commissioner of Income-tax,
Kerala v. West Coast Chemicals and Industries Ltd.(1) understood the Doughty's
"This case shows that where a slump
price is paid and no portion is attributable to the stock-in-trade, it may not
be possible to hold that there is a profit other than what results from the
appreciation of capital. The essence of the matter, however, is not that an
extra amount has been gained by the selling out or the exchange but whether it
can fairly be said that there was a trading from which alone profits can arise
It follows from the above that once it is
accepted that there was a slump transaction in this case. .e. that the business
was sold as a going concern. the only question that remains is whether any
portion of the slump price is attributable to the stock in trade the learned
counsel for the appellant relies on two grounds to support the contention that
there is profit attributable to the sale of land which was stock-in-trade of
the vendors. He says first that in the schedule to the agreement the value of
land and the value of goodwill and other items is specified. He says that
although the amount of Rs. 2,50,000 was shown as price of goodwill, it was
really excess value of the land sold along with other assets. Secondly. he
says, relying on the passage already cited above from Doghty's case("')
that the vendors' business was a business of purely buying and selling land.
In our opinion. on the facts of this case it
cannot be said that the vendors were carrying on the business of purely buying
and selling land. In (1) 46 I.T.R. 135.
(2)  A.C. 327.
618 this case the vendors were engaged in
buying land, developing it and then selling it. The agreement itself shows that
the vendors had already incurred debts and liabilities for development expenses
such as opening out roads, laying out drains and, sanitary arrangements,
providing electricity and providing for a school.
It seems to us that in the case of a concern
carrying on the business of buying land, developing it and then selling it, it
is easy to distinguish a realisation sale from an ordinary sale, and it is very
difficult to attribute part of the slump price to the cost of land sold in the
realisation sale. The mere fact that in the schedule the price of land is
stated does not lead to the conclusion that part of the slump price is necessarily
attributable to the land sold.
there is no evidence that any attempt was
made to evaluate the land on the date of sale. As the vendors were transferring
the concern to a company, constituted by the vendors themselves, no effort
would ordinarily have been made to evaluate the land as on the date of sale.
What was put in the schedule was the cost price, as it stood in the books of
the vendors. Even if the sum of Rs. 2,50,000 attributed to goodwill is added to
the cost of land, it is nobody's case that this represented the market value of
In our view the sale was the sale of the
whole concern and no part of the slump price is attributable to the cost of
land. If this is so, it is clear from the decision of this Court in
Commissioner of Income-tax, Kerala v. 14lest Coast Chemicals and Industries
Ltd.(1) and Doughty's case(2) that no part of the slump price is taxable. We,
therefore, answer question No. 3 in the negative. As stated before, in view of
this answer, it is not necessary to answer questions Nos. 2 and 4.
The appeal is accordingly dismissed with
(1) 46 I.T.R.135.
(2)  A.C. 327.