1965 (3) TMI 22 - SC - Income Tax

Whether on the facts and circumstances of this case by the sale of the whole business concern it could be held that there was taxable profit in the sum of ₹ 2,50,000 ? Held that - In the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of ₹ 2,50,000 attributed to goodwill is added to the cost of land, it is nobody s case that this represented the market value of the land. Thus the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of this court in Commissioner of Income-tax v. West Coast Chemicals & Industries Ltd. 1962 (3) TMI 5 - SUPREME Court that no part of the slump price is taxable. We, therefore, answer question in the negative.

Issues Involved:
1. Competency of the Income-tax Officer to file an appeal.
2. Determination of whether Rs. 2,50,000 represented surplus on the sale of lands or the value of goodwill.
3. Taxability of profit from the sale of the whole business concern.
4. Existence of taxable profit in the amount of Rs. 2,50,000 considering the share capital arrangement.

Detailed Analysis:

Issue 1: Competency of the Income-tax Officer to file an appeal
The first issue regarding the competency of the Income-tax Officer to file an appeal was given up before the High Court, and thus, it was not necessary to address this issue in the judgment.

Issue 2: Determination of whether Rs. 2,50,000 represented surplus on the sale of lands or the value of goodwill
The High Court held that the amount of Rs. 2,50,000 shown as the value of goodwill must be represented by surplus on the sale of lands, which was the stock-in-trade of the assessee-company. This conclusion was drawn based on the itemization of the assets transferred to the company and the absence of any question of variation in the figures given in the agreement for sale.

Issue 3: Taxability of profit from the sale of the whole business concern
The Appellate Tribunal and the High Court both held that the transaction was a sale of the business as a going concern. The Tribunal observed that the sale was not of individual assets but of the entire business, including stock-in-trade, and thus, the profit arising from the sale was taxable income. However, the Tribunal dismissed the appeal, stating that the transaction was merely an adjustment of the business position of the partners and that the income-tax department could not rely on mere book-keeping entries as evidence of profit.

The Supreme Court referred to the Privy Council decision in Doughty's case, which established that the sale of a whole concern does not give rise to a profit taxable to income-tax if it is a slump transaction, i.e., the business was sold as a going concern. The Court emphasized that in such cases, it is difficult to attribute part of the slump price to the stock-in-trade, and no portion of the slump price is taxable if the sale is of the whole concern.

The Supreme Court concluded that the sale in this case was a sale of the whole concern and no part of the slump price was attributable to the cost of land. Consequently, no part of the slump price was taxable, and the Court answered question No. 3 in the negative.

Issue 4: Existence of taxable profit in the amount of Rs. 2,50,000 considering the share capital arrangement
The High 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 out of 39,300 shares made no difference. The Court found no difference in principle between the conversion of a business into a private limited company and one converted into a public limited company if outsiders were not allotted a significant proportion of the shares issued.

Conclusion:
The Supreme Court dismissed the appeal, affirming the High Court's decision that no part of the slump price was taxable. The sale was considered a sale of the whole concern, and the transaction did not result in any taxable profit. The appeal was dismissed with costs.

← Previous Next →