1966 (9) TMI 37 - SC - Income Tax

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 the second proviso to section 10(2)(vii) of the Indian Income-tax Act ? Held that - 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 section 10(2)(vii), second proviso. Appeal dismissed

Issues Involved:

1. Whether the sum of Rupees forty thousand two hundred and forty-seven could be deemed to be profits of the assessee-company under the second proviso to section 10(2)(vii) of the Indian Income-tax Act.
2. Whether the High Court erred in considering evidence not placed before the Income-tax Officer or the Tribunal.
3. Whether the transaction between the appellant-company and Messrs. Phelps & Co. Ltd. constituted a sale in a commercial sense.
4. Whether the doctrine of "lifting the veil of corporate personality" applies to this case.
5. Whether the transaction was a nominal transaction or a slump sale.

Detailed Analysis:

1. Deemed Profits under Section 10(2)(vii):

The Income-tax Officer taxed the difference between the original cost and the written down value of the building as deemed profit under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. The Tribunal initially upheld the appellant's contention that the sale of assets was "in substance to self" and no profit resulted. However, the High Court disagreed, stating that the transaction constituted a sale between two distinct entities, and thus the difference was taxable as profit.

2. High Court's Consideration of Evidence:

The appellant-company argued that the High Court erred by relying on evidence not presented before the Income-tax Officer or the Tribunal. The Supreme Court agreed, noting that the High Court is bound to proceed based on the findings of the Tribunal and cannot admit or consider additional evidence. Therefore, the Supreme Court disregarded the High Court's observations that were not supported by the Tribunal's findings.

3. Transaction as a Sale in Commercial Sense:

The Supreme Court examined whether the transaction was a genuine sale. The court referenced previous cases, such as Sir Homi Mehta's Executors and Rogers & Co., which established that transactions must result in real profit from a commercial standpoint to be taxable. The Supreme Court concluded that the transaction between the appellant-company and Messrs. Phelps & Co. Ltd. was a sale in a commercial sense, as the assets were transferred for a stated consideration.

4. Lifting the Veil of Corporate Personality:

The appellant-company contended that the transaction was a readjustment of business position and not a genuine sale, invoking the doctrine of "lifting the veil of corporate personality." The High Court rejected this, stating that the doctrine applies only to a limited class of cases. The Supreme Court did not express a final opinion on whether corporate personality can be ignored in tax cases but noted that this case involved a sale between two distinct companies, not a readjustment of business positions.

5. Nominal Transaction or Slump Sale:

The appellant-company argued that the transaction was nominal and that the property remained with the same entity. This contention was not raised before the Tribunal and thus could not be considered by the Supreme Court. Additionally, the appellant claimed that the sale was a slump sale, where no separate valuation of assets was made. The Supreme Court rejected this, noting that the agreement specified the consideration for each item of property sold, distinguishing it from cases like Doughty v. Commissioner of Taxes where no separate valuation was made.

Conclusion:

The Supreme Court decided the appeal on the narrow ground that the appellant-company sold the property for a stated consideration, which was not shown to be notional. Since the consideration exceeded the original cost of the building, the difference was deemed profit under section 10(2)(vii), second proviso. The appeal was dismissed with costs.

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