Messrs. Associated Clothiers Ltd. Vs.
Commissioner of Income-Tax, Calcutta [1966] INSC 181 (23 September 1966)
23/09/1966 SHAH, J.C.
SHAH, J.C.
RAMASWAMI, V.
BHARGAVA, VISHISHTHA
CITATION: 1967 AIR 788 1967 SCR (1) 512
ACT:
Indian Income-tax Act, 1922 (11 of 1922), s.
10(2)(vii)-Sale of assets by one company to another-Circumstances in, which
sale can be treated as "in substance to self"-Applicability of s.
10(2)(vii) to such transaction.
HEADNOTE:
The appellant a private limited company, was
originally registered as /s. Phelps & Company Ltd." but on March 21,
1952 by an order under S. 11(4) of the Indian Companies Act, 1913, its name was
changed to "Messrs Associated Clothiers Ltd." On the same day a
company styled "Messrs. Phelps & Co. Ltd." was incorporated. By a
written agreement, also of the same date, the appellant company agreed to
transfer its assets to Messrs Phelps & Co. Ltd. Consideration for the
transfer consisted, apart from cash, of allotment of certain shares of Messrs
Phelps & Co. Ltd. to the appellant and the taking over of the latter's
liabilities by the former.
Among the assets transferred under the
agreement was a building described in the second schedule to the agreement.
The original cost of this building was Rs.
97,252/and its written value was Rs. 57,011/-, but in the balance sheet far the
account year ending March 31, 1953 as well as in the aforesaid agreement its
value was shown as Its. 2, 4,573/-.
In Income-tax proceedings relating to the
account year 195253 the Income tax Officer brought to tax under s. 10(2)(vii)
of the Indian Income-tax Act, 1922, the difference between the original cost
and the written down value of the building on the date of transfer. Before the
Income-tax Appellate Tribunal it was contended by the appellant that the sale
of the assets of the appellant company was 'in substance to self' and therefore
S. 10(2)(vii) was inapplicable. The Tribunal decided, in favour of the company
but the High Court held against. it. The company thereupon came to this Court
in appeal by certificate.
HELD: The sale was by one company to another,
it was not a case in which persons carrying on business had floated a private
limited company and had attempted to readjust their business positions. The
sale was for a stated consideration which had not been shown to be notional and
since the consideration was in excess of the original cost of the building the
difference between the original cost and the written down value was profit
within the meaning of s. 10(2)(vii) second proviso. [517 G-H; 519 F] Sir Homi
Mehta's Executors' case, 28 I.T.R. 928 and Rogers & Co. v. Commissioner of
Income-tax, Bombay City II 34 I.T.R.
336, distinguished.
Chirtoor Motor Transport Co. (P) Ltd. v.
Income-tax Officer, Chittoor, 59 I.T.R. 238, relied on.
Bank of Chettinad Ltd. v. Commissioner of
Income-tax, Madras, 8 I.T.R. 522., Maharajadhiraj Sir Kameshwar Singh v. Commissioner
of Income-tax , Bihar and Orissa, 48 I.T.R. 483 and Doughty v. Commissioner of
Taxes, [1927] A.C. 327, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 969 of 1965.
513 Appeal from the judgment and order dated
February 5 1963 of the Calcutta High Court in Income-tax Reference No. 3 of
1958.
S. S. Shukla, for the appellant.
S. T. Desai, A. N. Kripal and R. N. Sachthey,
for the respondent.
The Judgment of the Court was delivered by
Shah, J. M/s. Phelps & Company Ltd. was registered as a private limited
company on September 30, 1939 to carry on the business of "Clothiers and
Tailors". On March 21, 1952 under an order made under s. 11(4) of the
Indian Companies Act, 1913, the name of the Company was altered to Messrs
Associated Clothiers Ltd. On the same day a company styled "Messrs. Phelps
& Co. Ltd." was incorporated. By a written agreement also of the same date
the appellant Company agreed to transfer its assets and liabilities to Messrs.
Phelps & Co. Ltd. in consideration of allotment of shares of the value of
Rs. 12,30,000/of Messrs. Phelps & Co. Ltd. and Rs' 23,291/10/5 payable in
cash, and Messrs. Phelps & Co. Ltd. taking over liabilities of the
appellant Company of the aggregate amount of Rs. 6,05,601/-/6. Under the terms
of the agreement the appellant Company purported to transfer seven items of
property described in the Schedules annexed to the deed : one of the properties
so agreed to be transferred was described in the second scheduled building at
Connaught Place, New Delhi, valued at Rs. 2,24,673/-. No deed of conveyance was
executed in pursuance of the agreement. It is, however, common ground that on
July 1, 1952, Messrs. Phelps & Co. Ltd. took over possession of the
properties agreed to be sold.
The original cost of the building described
in the second schedule was Rs. 97,258/and the written down value of the
building after deducting depreciation allowed from time to time in the records
of the Income-tax Officer was Rs.
57,011/-. In the balance sheet of the
appellant Company dated March 31, 1953 the building was valued at Rs.
2,24,673/the price for which it was agreed to
be sold. In proceedings for assessment for the account year 1952-53 the
Income-tax Officer, Companies, District IV, Calcutta, brought to tax the
difference between the original cost and the written down value of the building
on the date of the transfer as deemed profit of the appellant Company under the
second proviso to s. 10(2)(vii) of the Indian Income-tax Act, 1922. Before the
Appellate Tribunal it was contended that the sale of assets to the appellant
Company was "in substance to self" and on that account no profit had
resulted to the Company and the amount sought to be brought to tax was not
liable to be included in the Company's profit. The Tribunal 514 relying upon
the decision of the Bombay High Court in Commissioner of Income-tax, Bombay
City v. Sir Homi Mehta's Executors(1) upheld that contention.
At the instance of the Commissioner of
Income-tax, Calcutta the following question was referred to the High Court of
Calcutta "Whether on the facts and in the circumstances of the case the
Tribunal was right in holding that the sum of rupees forty thousand two hundred
and forty seven could not be deemed to be profits of the assessee company under
second proviso to, s. 10(2)(vii) of the Indian Income-tax Act ?" The High
Court answered the question in the negative.
Against the order passed by the High Court,
with certificate under s. 66A(2) of the Indian Income-tax Act, this appeal is
preferred.
The High Court was of the view that the
principle of the decisions in Sir Homi Mehta's Executor's case() and in Rogers
& Co. v. Commissioner of Income-tax, Bombay City 11(2), did not apply to
the facts of the present case, since at all material times there were in
existence two corporations which were distinct and the transfer by one
corporation of its assets to another cannot be deemed to be a transfer to self;
that the transaction by which the appellant Company transferred its assets to
Messrs. Phelps & Co. Ltd. was a transaction of sale, and the doctrine of
"lifting the veil of corporate personality" had application only to a
limited class of cases, and the case of the appellants could not be brought
within that class; and since the two companies "continued to exist side by
side" for many years after the appellant Company had transferred its
assets to Messrs Phelps & Co. Ltd., two different Companies which carried
on business simultaneously could not be regarded as one entity. In this appeal
with certificate, the appellant Company contends that the High Court gravely
erred in recording its opinion on the question submitted, relying on evidence
which was never placed before the Income-tax Officer or the Tribunal. Counsel
urged that the observations made by the High Court that Messrs. Phelps &
Co. Ltd. and the appellant Company "continued to exist side by side as two
separate limited Companies" and carried on business simultaneously for,
more than ten years is borne out by no evidence on the record. This criticism
has force.
The High Court in a reference under s. 66(1)
or (2) is bound to proceed on the findings recorded by the Income-tax Appellate
Tribunal: it has no power to admit on record additional evidence, as the High
Court did, and to consider that additional evidence which was not placed before
the Tribunal. We must therefore proceed on the view (1) 28 I.T.R. 928.
(2) 34 I.T.R. 336.
515 that there is no evidence before the
Tribunal and no finding of the Tribunal that after transferring its assets the
appellant Company carried on business.
Counsel for the Company also submitted that
the Tribunal was in error in 'observing that the appellant Company had
transferred all its assets and liabilities to the new Company. But in the
statement of the case which is based upon the judgment of the Tribunal, there
is a clear recital -that all the assets and liabilities of the appellant
Company were transferred to Messrs. Phelps & Co. Ltd.
Counsel asked us to ignore that statement in
view of the recital made in the preamble clause of the agreement dated March
29, " 1 952 in which it was recited that Messrs.
Phelps & Co. were "desirous of
acquiring a part of the undertaking and property of the Vendor Company."
But there is nothing in the recitals which indicates that any assets were
retained by the appellant Company. The Tribunal in deciding the appeal before
it observed "Associated Clothiers Ltd. were owners of a business having
assets and liabilities. By sale to Phelps & Co. Ltd. they got the entire
ownership by way of 'shares and the same assets and liabilities remained in the
hands of Phelps & Co. Ltd." This Court must accept the statement made by
the Tribunal in the statement of the case, especially when no objection was
raised thereto before the Tribunal or before the High Court on behalf of the
appellant Company at any time.
On the question whether in determining
liability of an assessee to pay income-tax it is open to the court to ignore
the corporate personality of a Company and to fix upon the ownership of the
business as decisive, there has been some difference of opinion. In Sir Homi
Mehta's Executors' case() the assessee and his sons had formed a private
limited company and transferred to that company shares in several joint stock
companies which the assessee held jointly with his sons at the market value of
the shares at that time. The departmental authorities levied income-tax on the difference
between the market price and the cost price of the shares. The High Court of
Bombay held that the so-called sale of the shares to the Company was not a
business activity entered into with the object of earning profit; that it was
not really a sale but a procedure adopted for readjustment of their position as
holders of the shares; and that the assessee did not make any profit or gain in
a commercial sense by transferring the shares to the Company and therefore the
difference between the market price and cost price of the shares was not
exigible to tax as profit of the business.
(1) 28 I.T.R. 928.
516 In Rogers & Co.'s case(1) the
partners of a firm carrying on the business of manufacturing aerated waters
formed themselves into a private limited company, the shares allotted to each
of them in the company being in the same proportions as the shares they held in
the firm. The assets of the firm were transferred to the company for a price
exceeding the written down value, and the difference between the original cost
of the assets and the written down value was brought to tax under s.10(2)(vii)
of the Income-tax Act.
The High Court held that the transfer of the
assets of the firm to the Company was merely a readjustment made by the members
to enable them to carry on their business as a Company rather than as a firm
and no profit in a commercial sense was made thereby, and therefore the
transfer of the assets of the firm to the Company was not a sale and the
provisions of the second proviso to s.10 (2) (vii) did not apply.
Chagla, C.J., in delivering the judgment in
Sir Homi Mehta's Executors' case(2) observed at p. 932;
"Whatever legal or technical form a
transaction may take, the Court must try and determine what, the real
transaction was and not the form which the transaction took." Again .the
learned Chief Justice in Rogers & Company's case(t) observed that in all
transactions which come up for consideration in a taxing statute the Court has
to look not at the legal form which the transaction has, but to the real nature
of the transaction, Counsel for the Revenue contends that in ignoring the legal
form and relying upon "the substance of the transaction" the High
Court of Bombay has erred. He relies in support of his submission upon the following
observations in the judgment of the Judicial Committee in Bank of Chettinad
Ltd. v. Commissioner of Income-tax, Madras(3) at p. 526 :-"The
Commissioner of Income-tax in his reference stated that "in substance
these loans represent money lent by the Pudukottai Bank to the Kanadukathan
Bank but the transactions have been unnecessarily complicated by resorting to a
series of entries which are as superfluous as they are confusing." Their
Lordships think it necessary once more to protest against the suggestion that
in revenue cases "the substance of the matter" may be regarded as
distinguished from the strict legal position." But the decision of the
Court in Sir Homi Mehta's Executors' case(2) was not rounded only upon the
ground that the real transaction" was different from what it purported to
be. The Court (1) 34 I.T.R. 336. (2) 28 I.T.R.
928.
(3) 8 I.T.R. 522.
517 in the two cases opined that in
determining whether a certain transaction resulted in profit, it must be found
that the transaction resulted in real profit,-profit which from the commercial
point of view meant a gain to the person who entered into the transaction, and
that by transferring the assets with the intention merely to readjust the
business relation of the owners of a business or assets no real profit was
earned.
Counsel for the Revenue relied upon the
decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner
of Income-tax, Bihar & Orissa(1). It was held in that case that the
doctrine that no man can make a profit out of himself is not applicable to
transactions between a person and a limited company, even though all the shares
in the company are owned by that person, because from "a legal point of
view a company is an entity entirely distinct from its shareholders." The
Court observed at p. 495 "............it is not possible in the
circumstances of this case, to ignore or disregard the mask of corporate entity
or to analyse the economic realities behind the transaction of sale."
Therefore the assessee though he was the owner of all the shares in the company
could not claim to be treated as if he were identical with the Company in order
to promote his own benefit or advantage. But in Maharajadhiraj Sir Kameshwar
Singh's case(') it seems to have been admitted that the price for which the
buildings, machinery and plant were transferred to the Company was not a
notional figure, and the price being in excess of the cost of buildings, machinery
and plant, s. 10(2)(vii) proviso was attracted, and the difference between the
written down value and original cost was held taxable.
It is unnecessary for the purpose of this
case to express any final opinion on the question, whether in taxing cases it
is open to the assessing authority to ignore the corporate personality of a company
and to hold that the interest of the shareholders in the shares of a company
and on the business of the Company is identical, and transfer by the owners of
a business to a Company in 'which the shares are owned by the former owners of
the business does not give rise to a sale in a commercial sense. The present is
not a case in which persons carrying on business have floated a private limited
company and have attempted to readjust their business position. Here is a case
in which the assets of one company have been sold to another. The question to
which attention must be directed is whether there was by the agreement, a
transaction of sale in a commercial sense.
(1) 48 I.T.R. 483.
518 In a recent judgment of this Court in
Chittoor Motor Transport Co. (P) Ltd. v. Income-tax Officer, Chittoor,(1) it
was held by this Court that where a private limited company transferred some of
its assets to a partnership consisting of three shareholders who held the
entire issue of shares of the company for a consideration, but the whole
business was not transferred, there was in truth a sale within the meaning of
Sale of Goods Act and under s.
10(2)(vii) the rebate received by the private
limited company would be liable to be forfeited. This Court declined to accept
the argument that when the company transferred the vehicles belonging to it to
the partnership, there was no commercial transaction. The Court observed at p.
242 :
"If we look at the resolution dated June
30, 1959, it is quite clear that, it is a sale for consideration of a number of
buses by the limited company to the partnership. It would be a sale under the
Sale of Goods Act and it would be a sale in any other proper meaning which
might be given to the word 'sale'. We are not concerned whether any profit
resulted to the assessee but what we are concerned with is whether the assessee
had sold or transferred these buses to the partnership.
To us the answer seems to be plain that
whether the transaction resulted in profit to the company or not, the transaction
comes within the purview of the latter part of section 10(2)(vii)."
Counsel for the Company also submitted that the transaction was merely a
nominal transaction and the property in the shares renamed with the same
Company in which it was vested.
This contention was never raised before or
decided by the Tribunal, and it does not arise out of the order of the
Tribunal.
It was then urged that there was no profit to
the Company since there was no evidence about the market value of the property
transferred and in the absence of any evidence to show that the property was
sold for a price exceeding the written down value, liability under s.
10(2)(vii) second proviso will not arise. But in the agreement the properties
sold were allotted specific values and no attempt was made at any time before
the Tribunal to prove that the values so allotted to the various properties
were not true.
Substantially the whole of the consideration
paid by Messrs.
Phelps & Co. Ltd. is in the form of
shares to the appellant Company, but unless there is evidence that the market
value of the shares was less than their face value, the claim made by the
appellant Company must fail. The burden of proving that the consideration for
sale of the property was less than what it purports to be under the agreement
of sale lay upon the Company and since no attempt was made to prove that fact,
the question cannot be raised for the first time in this Court.
(1) 59 I.T.R. 238.
519 It was also said that the transfer was a
slump sale of the assets and there being no separate sale of the property
described in the second schedule, the difference between the written down value
and the cost price was not liable to be included as income in the process of
assessment. Reliance in this behalf was placed upon the observations of the
Judicial Committee of the Privy Council in Doughty v.
Commissioner of Taxes(1). In that case two
partners carrying on business as general merchants and drapers sold the entire
assets and goodwill of the partnership business to a limited company in which
they became the only shareholders. 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. The Judicial Committee held that
the assessment was wrongly made since if the transaction was to be treated as a
sale there was no separate sale of the stock, and no valuation of it as an item
forming part of the aggregate sold. This Court has affirmed the principle in
Doughty's case in a recent judgment : Commissioner of Income-tax v. Mugneeram
Bangur & Company (2).
That principle has however no application
here. In the present case it is true that the entire assets of the appellant
Company were sold to Messrs. Phelps & Co. Ltd.
There was no separate sale of different items,
but the consideration of each item of property sold was expressly mentioned in
the agreement of sale. The contention that the transaction of sale was a mere
attempt to readjust the business position of the transferor was never raised
before the Tribunal and does not arise out of the order of the Tribunal.
We decide this appeal on the narrow ground
that the appellant Company sold the property in the second schedule for a
stated consideration which was not shown to be notional, and since the
consideration was in excess of the original cost of the building, the
difference was profit within the meaning of s. 10(2)(vii) second proviso.
The appeal therefore fails and is dismissed
with costs.
G.C. Appeal dismissed.
(1) [1927] A.C. 327.
(2) 57 I.T.R. 299.
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