1964 (4) TMI 113 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sale on January 21, 1948, was by the assessee firm or by its partners in their individual capacity.
2. Whether the sum of Rs. 5,06,557 is chargeable under section 10(2)(vii) of the Act.
3. Whether the sum of Rs. 19,59,258 is chargeable as capital gains under section 12B of the Income-tax Act.
4. Whether the excess receipts on the transfer (sale) of the stock of sugar to the limited concern is chargeable to tax under section 10 of the Income-tax Act.

Detailed Analysis:

1. Sale by Assessee Firm or Individual Partners:
The court determined that the sale on January 21, 1948, was effected by the assessee firm and not by its partners in their individual capacity. The Tribunal noted that there was no deed of dissolution nor any evidence of the firm's dissolution. The agreement of sale indicated that the assessee was a party to the agreement, not the individual partners. The business was transferred as a going concern, and the memorandum of association of the company and the certificate from the Controller of Capital Issues both supported this conclusion. Therefore, the firm was not dissolved at the time of the transfer.

2. Chargeability under Section 10(2)(vii):
The court addressed whether the sum of Rs. 5,06,557, being the difference between the original cost and the written-down value of assets, was chargeable under section 10(2)(vii) of the Act. The assessee argued that there was no sale in the commercial sense since the partners were also the shareholders of the company. However, the court found no evidence that the partners were the only shareholders or that they held almost all the shares. The certificate from the Controller of Capital Issues indicated that shares worth Rs. 40,00,000 were to be issued, while the statement of the case showed that shares worth Rs. 30,00,000 were allotted to the partners. This suggested the presence of other shareholders. Consequently, the court affirmed the Tribunal's decision, stating that the second proviso to section 10(2)(vii) applied and the sum was chargeable.

3. Chargeability as Capital Gains under Section 12B:
The court examined whether the sum of Rs. 19,59,258 was chargeable as capital gains under section 12B of the Income-tax Act. The assessee contended that the gain was not chargeable because the case fell under the third proviso to section 12B, which exempts gains arising from the distribution of capital assets on the dissolution of a firm. However, the court found that the assessee was not dissolved at the time of the sale, and there was no distribution of capital assets among the partners. Therefore, the third proviso to section 12B did not apply, and the gain was chargeable as capital gains.

4. Taxability of Excess Receipts on Transfer of Stock:
The supplementary statement of the case raised the issue of whether the excess receipts on the transfer of stock of sugar to the limited concern were chargeable to tax under section 10 of the Income-tax Act. The court upheld a preliminary objection, noting that the application for the supplementary statement was made under section 66(4), which was not maintainable. The Supreme Court's decision in Kamlapat Motilal v. Commissioner of Income-tax clarified that such applications should be made under section 66(2). Since the application was not maintainable, the reference was deemed incompetent, and the court declined to answer this question.

Conclusion:
The court concluded that the sale was by the assessee firm, the sum of Rs. 5,06,557 was chargeable under section 10(2)(vii), and the sum of Rs. 19,59,258 was chargeable as capital gains under section 12B. The preliminary objection regarding the supplementary statement was upheld, and the court declined to answer the related question on the taxability of excess receipts on the transfer of stock.