1973 (5) TMI 4 - HC - Income Tax

Transfer of business as going concern to private limited company - Whether the amounts to a sale and whether the excess amount over written down value is liable to income-tax - In the return for the year ending March 31 1959 the assessee included a sum of Rs. 223 referable to income from the business on 1st and 2nd April 1959. The assessee had not asked for any change in the previous year. The Tribunal has found as a fact that the assessee carried on business for a part of the previous year ending March 31 1960 that the assessee had plied buses on 1st and 2nd April 1959 and therefore the income of Rs. 223 was assessable as income from business in the assessment year 1960-61 therefore we answer the questions referred in the affirmative and against the assessee

Issues Involved:
1. Validity of the assessment of Rs. 223 as income from business.
2. Assessability of Rs. 80,530 under the second proviso to section 10(2)(vii) of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Validity of the assessment of Rs. 223 as income from business:
The assessee included a sum of Rs. 223 as income from business for the period of 1st and 2nd April, 1959, in the return for the year ending March 31, 1959. The Tribunal found that the assessee carried on business for a part of the previous year ending March 31, 1960, and had plied buses on 1st and 2nd April, 1959. Consequently, the income of Rs. 223 was deemed assessable as income from business in the assessment year 1960-61. The court upheld this decision, affirming that the inclusion of Rs. 223 as business income was valid.

2. Assessability of Rs. 80,530 under the second proviso to section 10(2)(vii) of the Income-tax Act, 1922:
The assessee transferred his transport business to a newly formed private limited company, Swathanthiram Transports Private Ltd., on April 2, 1959. The written down value of the motor vehicles was Rs. 58,066, transferred for Rs. 1,37,186, and a car with a written down value of Rs. 6,720 was transferred for Rs. 7,500. The total transaction amounted to Rs. 1,60,606, with the company allotting 575 shares to the assessee and 25 shares to his wife. The balance consideration was shown as a credit in the company's books.

For the assessment year 1959-60, the Income-tax Officer assessed a profit of Rs. 60,396 under section 10(2)(vii). The Tribunal, however, held that no sale occurred in the previous year ending March 31, 1959, as the company was incorporated only on April 3, 1959. This led to the reassessment of the profit for the year 1960-61, where the Income-tax Officer assessed Rs. 80,530 as profit under section 10(2)(vii).

The assessee contended that the transfer was not a sale in the commercial sense and that there was substantial identity between the vendor and the vendee-company. However, the Tribunal and the court held that the company and the assessee were distinct legal entities, thus constituting a sale. The court referenced the Supreme Court's approval of the Patna High Court's decision in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, which established that a private limited company is a separate legal entity from its shareholders.

The assessee further argued that the transaction was an exchange rather than a sale, as the consideration was in the form of shares and a credit entry rather than cash. The court, however, held that the transaction met the criteria of a sale under section 10(2)(vii), as it involved a transfer of ownership for a price, even if the price was promised rather than paid immediately.

The court also addressed the argument that the sale was a realisation sale of the entire business and thus not taxable under section 10(2)(vii). It was clarified that the amendment to section 10(2)(vii) by Act 67 of 1949 made it clear that the liability to a balancing charge arises even if the business was not in existence in the accounting year or the sale was for winding up the business.

Hence, the court concluded that the sum of Rs. 80,530 was assessable under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922.

Conclusion:
The court answered both questions in the affirmative, validating the assessment of Rs. 223 as income from business and confirming the assessability of Rs. 80,530 under the second proviso to section 10(2)(vii) of the Income-tax Act, 1922.

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