1963 (2) TMI 65 - HC - Income Tax

Summary

Issues: Interpretation of the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922 regarding the taxability of the difference between the written down value and the value entered in the books of a company after transfer of assets from an association of persons to the company.

Analysis:
The case involved a reference by the Income-tax Appellate Tribunal regarding the taxability of a sum of Rs. 45,698 under the second proviso to section 10(2)(vii) of the Income-tax Act for the assessment year 1956-57. The assessee, an association of persons, transferred their bus transport business to a private limited company formed by the members. The difference between the written down value and the value entered in the books of the company was in question for tax assessment. The key issue was whether this difference was taxable under the second proviso to section 10(2)(vii) of the Act. The proviso states that the excess amount from the sale of assets over the original cost shall be deemed as profits. However, the interpretation of the term "sale" in this context was crucial in determining the tax liability.

The court analyzed the legal position that a company is a distinct legal entity from its shareholders, emphasizing that the assets and debts of the company are separate from those of the shareholders. The critical question was whether the transfer of assets from the association of persons to the company constituted a "sale" in the strict legal sense as per the provisions of the Act. The court referred to a similar case decided by the High Court of Bombay, where it was held that the real nature of the transaction, rather than just the legal form, should be considered in determining tax liability. The court agreed with the previous decisions of the High Courts of Bombay and Calcutta, stating that if no real sale or profit occurs due to the virtual identity of the vendor and the vendee, the second proviso to section 10(2)(vii) is not applicable, and no tax liability arises.

In conclusion, the court answered the reference in the negative, ruling against the department. It was held that the second proviso to section 10(2)(vii) does not apply when there is no actual sale or profit due to the similarity between the vendor and the vendee. The judgment highlighted the importance of considering the substance of a transaction rather than just its legal form in determining tax implications.