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Issues Involved:
1. Competency of the appeal filed by the Income-tax Officer. 2. Transfer of business and assets from a firm to a public limited company. 3. Valuation and existence of goodwill in the transferred business. 4. Taxability of the profit arising from the transfer of the business. Detailed Analysis: 1. Competency of the Appeal Filed by the Income-tax Officer: The first issue pertains to the competency of an appeal filed by the Income-tax Officer, Central Circle XIV, Calcutta, against the order of the Appellate Assistant Commissioner of Income-tax, Range-A, Calcutta. This point was not pressed before the court and is covered by a judgment of a Division Bench in the case of Commissioner of Income-tax v. Sarkar & Co. Therefore, this issue was not further deliberated upon. 2. Transfer of Business and Assets from a Firm to a Public Limited Company: The central question here is whether the partners of the firm made a profit in the transaction which is assessable to income-tax. Mugneeram Bangur & Co., Land Department, transferred its business to Amalgamated Land Development Company Ltd. The consideration for the transfer was Rs. 34,99,300, which included various assets such as land, goodwill, motor cars, furniture, mortgages, deposits, advances, and cash in the bank. The value of the land was shown as the cost of acquisition over time, and the values of other assets were based on their written down values in the books of account. 3. Valuation and Existence of Goodwill in the Transferred Business: The controversy centers around the item of goodwill valued at Rs. 2,50,000. The department contended that there was no goodwill in respect of the transaction and that the value attributed to goodwill was essentially the increase in the value of the land. The department's contention was based on several points, including the fact that the assessee firm and another firm with similar partners carried on business in lands and buildings, the different names and addresses of the firm and the new company, and the absence of an undertaking by the members of the assessee firm not to carry on a similar business. The assessee argued that the transaction was essentially a transfer by the members of the firm to themselves as a company, and thus it was not a business transaction that could result in profit. They relied on the principle that a man cannot make a profit out of himself and cited the well-known judgment in Doughty v. Commissioner of Taxes [1927] A.C. 327 to support their argument. 4. Taxability of the Profit Arising from the Transfer of the Business: The court examined various precedents, including Doughty v. Commissioner of Taxes [1927] A.C. 327, Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 I.T.R. 506, and Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 I.T.R. 928. The principle derived from these cases is that a man cannot make a profit in a transaction where he figures both as a vendor and as a purchaser. The court concluded that the transaction in question was a slump transaction entered into for the purpose of carrying on business more conveniently, and thus no profit arose from it. The court also discussed the case of Sharkey v. Wernher [1956] A.C. 58; 29 I.T.R. 962, where the House of Lords held that the withdrawal of stock-in-trade must be accounted for at market value. However, it was noted that the principles in Sharkey's case run counter to those in Kikabhai's case, and the court was bound by the principles laid down in Kikabhai's case. In conclusion, the court held that 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 liability company. The fact that two outsiders were brought in as directors with seven shares allotted to them made no difference. The court also addressed the valuation of goodwill and held that the Rs. 2,50,000 shown as the value of the goodwill must be represented by the surplus on the sale of lands, which was the stock-in-trade of the assessee company. Separate Judgment: RAY J. concurred with the judgment delivered by G. K. Mitter, J., and agreed with the conclusions reached. Order: The court concluded that there was no profit in the transaction that could be taxed, and the questions referred were answered accordingly.
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