1967 (11) TMI 30 - HC - Income Tax

Transfer of machinery to firm by sole partners at appreciated value - juristic person - mere fact that the assessee transferred its interest to the firm at an appreciated value does not make the assessee liable to pay tax

Issues Involved:
1. Whether the sum of Rs. 4,00,000 should be included in the total income of the assessee.

Issue-wise Detailed Analysis:

1. Inclusion of Rs. 4,00,000 in Total Income:

Background:
The primary issue in this case is whether a sum of Rs. 4,00,000 should be included in the total income of the assessee. The Income-tax Officer included this amount, but both the Appellate Assistant Commissioner and the Appellate Tribunal excluded it, deciding against the revenue.

Facts:
- A joint venture existed between two companies for the purchase and sale of machinery.
- The interest in the venture was sold to the assessee-company and another entity.
- The remaining machinery was divided between these two entities.
- The assessee-company received machinery valued at Rs. 2,06,372 and later appreciated its value by Rs. 4,00,000 in its books.
- The machinery was then transferred to a new partnership firm at the appreciated value.

Revenue's Argument:
- The revenue contended that the transaction was essentially a sale of machinery at a profit of Rs. 4,00,000 and should be included in the total income of the assessee.
- They argued that the transaction should be viewed from a commercial perspective, indicating a clear transfer of the partner's asset to the firm at a higher value.
- They claimed that the transfer occurred between two distinct entities: the assessee-company and the partnership firm.

Assessee's Argument:
- The assessee argued that there was no sale or transfer between the assessee-company and the partnership firm, as the firm was not a juristic person.
- They relied on various legal precedents to support that no real income or profit was received from the transaction.

Legal Precedents Discussed:
- Kikabhai Premchand v. Commissioner of Income-tax: The Supreme Court held that withdrawal of stock-in-trade did not result in income or profit.
- Commissioner of Income-tax v. Homi Mehta's Executors: The Bombay High Court ruled that transferring shares to a company was not a business activity or sale.
- Rogers and Co. v. Commissioner of Income-tax: The transfer of firm assets to a company was seen as a readjustment, not a sale.
- Commissioner of Income-tax v. Bai Shirinbai K. Kooka: The Supreme Court distinguished between actual profits from sales and notional profits from stock withdrawals.
- Commissioner of Income-tax v. Mugneeram Bangur & Co.: The Supreme Court ruled that the sale of a business as a going concern did not attribute profit to the stock-in-trade.
- Associated Clothiers Ltd. v. Commissioner of Income-tax: The Supreme Court upheld the revenue's stance when the consideration for each item sold was specified.

Court's Analysis:
- The court emphasized the substance over form in determining taxability.
- It was noted that the assessee-company merely appreciated the value of its machinery before transferring it to the partnership firm.
- The court found no real income or profit from the transaction, as it was a readjustment of assets within the same entity.
- The court also highlighted that a partnership firm is not a juristic person distinct from its partners, thus no sale or transfer could occur between the assessee-company and the firm.

Conclusion:
- The court concluded that the transaction did not yield any real income or profit for the assessee.
- The question was answered in the affirmative, favoring the assessee, and the sum of Rs. 4,00,000 was not included in the total income.
- The assessee was entitled to costs.

Judgment:
- The judgment was delivered in favor of the assessee, with the court agreeing that the sum of Rs. 4,00,000 should not be included in the total income of the assessee.
- The decision was concurred by both judges, and the question was answered affirmatively.

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