1968 (8) TMI 14 - SC - Income Tax

Section 10(2)(vii), proviso (ii) is attracted if there be a sale of the building, machinery or plant and the amount for which the sale takes place exceeds the written down value of the assets transferred. If there be no sale, the proviso has no application - Revenue's appeal allowed

Issues Involved:
1. Taxability of excess realized over the written down value of machinery under section 10(2)(vii), proviso (ii), of the Indian Income-tax Act, 1922.
2. The nature of the transaction-whether it was a sale or a readjustment of business relations.
3. Applicability of the principle of "substance over form" in taxation.
4. Whether the transfer was in the course of winding up or realization sale.
5. Determination of whether the transaction constituted a sale.

Issue-wise Detailed Analysis:

1. Taxability of Excess Realized:
The respondents, a firm engaged in manufacturing, purchasing, and selling cloth, transferred its machinery to a private limited company. The Income-tax Officer taxed Rs. 40,743, the excess realized over the written down value of the machinery, under section 10(2)(vii), proviso (ii), of the Income-tax Act, 1922. The Tribunal, relying on previous judgments, held that no profit in a business sense resulted from the transfer, as it was merely a readjustment of business relations.

2. Nature of the Transaction:
The Tribunal and the High Court relied on precedents such as Commissioner of Income-tax v. Sir Homi Mehta's Executors and Rogers & Co. v. Commissioner of Income-tax, which held that transfers made to carry on business in a different form (from a firm to a company) did not amount to a sale generating taxable profit. The essence was that such transfers were seen as readjustments rather than sales.

3. Substance Over Form Principle:
The Supreme Court rejected the principle that the substance of a transaction should override its legal form in taxation matters. Citing Inland Revenue Commissioners v. Duke of Westminster and Bank of Chettinad Ltd. v. Commissioner of Income-tax, the Court emphasized that the legal character of a transaction determines tax liability, not its perceived substance. The Court reiterated that the true legal relation arising from a transaction alone determines the taxability of a receipt.

4. Transfer in Course of Winding Up or Realization Sale:
The respondents contended that if the transfer was for closing down the business, no taxable profit resulted. The Supreme Court noted that the Tribunal did not find the transfer to be a realization sale or part of winding up. The Court referenced Commissioner of Income-tax v. West Coast Chemicals & Industries Ltd., which held that differences between written down value and sale price in realization sales were not taxable under the pre-1949 amendment law. However, post-amendment, even realization sales could attract tax if the sale price exceeded the written down value.

5. Determination of Sale:
The Supreme Court highlighted the necessity of determining whether the transaction constituted a sale. Citing Commissioner of Income-tax v. R. R. Ramakrishna Pillai, the Court explained that transferring assets in exchange for shares might constitute an exchange, not a sale. The Tribunal had not clearly established whether the transaction was a sale resulting in excess realization over the written down value. Therefore, the Court could not definitively answer the question of taxability.

Conclusion:
The Supreme Court discharged the High Court's answer and remanded the case to the Tribunal for rehearing and clear findings on whether the transaction was a sale resulting in taxable excess realization. The appeal was allowed with no order as to costs.

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