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TMI Blog1997 (7) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... Caltex Ltd. for manufacture and marketing of lubricants, greases and related petroleum products. The agreement provided that soon after the incorporation of the JVC, the applicant-company would, for the purpose of participation in the ownership of the JVC, offer its blending plant at Budge Budge to the JVC at such value, as might be decided later, against fully paid-up equity shares of the JVC. The agreement further contained the condition that the parties would procure incorporation certificate for the JVC as a company limited by share under the Companies Act, 1956, having authorised share capital of 600 million rupees divided into 60 million (60,000,000) equity shares of Rs. 10 each to be apportioned between Caltex and IBP in the ratio of 51: 49. After the JVC obtains the certificate of incorporation in the name of IBP-Caltex Ltd., it became an entity distinct from its promoters and entered into a separate agreement dated July 19, 1994 with IBP for transfer of the said blending plant, comprising of both movable and immovable assets of total worth Rs. 850 lakhs, by a deed of transfer which, however, covers only the building and fixed plants and machineries leaving the movable asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of blending plant was made as a whole and as a going concern, and hence not exigible to sales tax. The applicants, therefore, have filed the present application for a declaration that the transaction in question is an exchange not exigible to sales tax, and for quashing the impugned assessment and for other consequential reliefs. 2.. The respondent No. 1 has filed an affidavit-in-opposition for self and other respondents denying all the material averments contained in the application of the applicants. The specific case of the respondents is that the allotment of shares to IBP by the JVC was the valuable consideration for the transfer of property in goods, viz., plant and machinery, etc., and that the contract for transfer of movables was distinct from transfer of immovable property. It is the further case of the respondents that, as evident from the books of accounts of the applicants, the transaction in respect of movable properties transferred separately was a transaction of sale of goods liable to be taxed and that accordingly the applicants were asked to pay tax on the sales of the movable properties. It is asserted by the respondents that the properties of the blending plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67] 66 ITR 725 (Commissioner of Income-tax, Kerala v. R.R. Ramakrishna Pillai). In that case five persons with their fleet of seven buses used to run a bus service (in short the service ), but subsequently they transferred the buses and the workshed to a private company floated by them and the consideration for the transfer, as entered in the profit and loss account of the service , was Rs. 74,000. However, the written down value of the buses in the books of account of the service was Rs. 24,302. It came up for consideration of Supreme Court if the difference between Rs. 70,000 the amount apportioned by the Income-tax Office as the value of the seven buses) and the sum of Rs. 24,302 was liable to be taxed under section 10(2)(vii), proviso 2, of the Income-tax Act on the ground that the transaction was of the nature of sale. The Supreme Court in giving its findings has observed that a transaction by which a person carrying on business transfers the assets of that business to another assessable authority may take different forms and may have different legal effect. In elaborating the point the court has given an instance of such a transaction by observing that where a person car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attempt for valuation of the properties of the cinema hall, involved in the transaction. In the operative part the fixing of any monetary consideration was no part of the bargain. Considering its legal effect, the Supreme Court came to a conclusion that the transfer was nothing but an exchange and that valuation of the assets given in the deed is only for the purpose of stamp duty. But we shall see later that the operative parts of the deeds of the impugned transaction before us stands on a separate footing. 6.. Drawing inference from the ratios of the above two decisions Shri Bose contends firstly, that transfer of the assets of the blending plant in return of the equity shares constitutes an exchange and secondly, that the use of expression exchange in these deeds in describing the nature of the transaction sets the real tone of the transaction, particularly when the substance of the transaction is that of an exchange. We take up the second contention first for discussion. Shri Bose has referred to the observation of the Supreme Court made in Sir Kikabhai Premchand s case [1953] 24 ITR 506 which runs as follows: In Revenue cases regard must be had to the substance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the substance of the transaction . 10.. Therefore, we shall ascertain the real nature of the transaction and then shall deal with the first contention of Shri Bose. Whenever there is transfer of assets of a person to a company against allotment of share of the latter to the former the transaction will not necessarily be one of exchange. Supreme Court in the case of Commissioner of Income-tax, Kerala v. R.R. Ramakrishna Pillai [1967] 66 ITR 725 has mentioned a situation where a person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor . The court has observed that in that case there are in truth two transactions-one a transaction of sale and the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions for transfer of the blending plant were left unsettled. It would suffice to say that within the bounds of the formation agreement there was no scope to visualize a transaction of exchange of the equity shares of determined value for the assets of the blending plant whose value was yet to be determined. 11.. The next document is the agreement between IBP and the JVC (annexure B to the application) after incorporation of the latter. In this document the IBP described itself as the transferor and the JVC described itself as the transferee. But in an exchange each party is a transferor in respect of the property which he wants to exchange for the other s property. Again, in such transaction each party is transferee in respect of the property he gets from the other in exchange for his own. 12.. The real intent of the parties is further evident from the text of the clause 10 which provides that the movable plant and machinery, furniture and fixture, motor car, being movable properties and capable of being transferred by delivery of possession, the sale and transfer thereof will be effected by delivery of possession and will not be included in the deed of transfer which wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The transferee shall bear and pay the stamp duty, registration charges and any other statutory levies and duties payable as a buyer (other than those Here Italicised. to be borne by the transferor in terms hereof) for or in respect of the sale transfer of the plant or any part thereof including the deed of conveyance/transfer and/or any other document. 17.. Next we pass on to the actual transfer deed (annexure C ). Here again IBP is described as the transferor and the JVC the transferee. While referring to sub-clause 1(a) of clause 3A of the Memorandum of Association, in para (7) at page 7 the deed speaks of purchase and/or otherwise acquisition. In the operative part of this deed (at its page 9) while stating the terms of transfer the following expression has been used: ...................the said plant, building and fixed plant and machinery hereby intended to be sold, transferred and conveyed............... 18.. If the above circumstances are dovetailed a clear picture of a sale emerges. Therefore, applying the test as propounded in the decision of the case of Commissioner of Income-tax, Kerala v. R.R. Ramakrishna Pillai [1967] 66 ITR 725 (SC) we hold that this tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial supplied in execution of a works contract for a lump sum money. We have already held that in the instant case before us the transaction consists of two transfers and the consideration in respect of one cancels the debt in respect of the other. 20.. According to Sri Gupta the impugned transfer between IBP and the JVC may be viewed from another premise. He does not dispute that where the owner of a property transfers it to another person in consideration of the said other person parting with his property in favour of the former, there is exchange. But he, relying on the decision reported in [1984] 55 STC 371 (Mad.) (Premier Electro Mechanical Fabricators v. State of Tamil Nadu), points out that where fully paid shares are allotted to a person by a company, in consideration of payment of the value of goods sold to them, the title to the shares becomes vested in the allottee; but allotment of share is not per se a transfer by the company at all, much less a transfer of the company s property or assets . He is of the opinion that shares in a company constitute the share capital of the company and in that view the shares are liabilities of the company and not assets. He elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew was taken by the division Bench of the Madras High Court in the case of Premier Electro Mechanical Fabricators 1984] 55 STC 371 in an identical situation where the assessee on two dates transferred some items of machinery of his business to a company against allotment of equity shares of that very company. It was observed by the division Bench of the Madras High Court that the transfer of machinery by the assessee to the company, as well as the allotment of shares by the company to the assessee, were recorded in the company s books, by means of appropriate entries in the company s assets account and the share capital account , and the consideration thus was shown as a cancellation of one debt by another: a debt by the company for the value of the machinery purchased and the obligation of the petitioner to subscribe to the face value of the equity shares . The court concluded that in the face of these entries in the accounts cancelling two interconnected or inter-dependent debts, the consideration must be held as equivalent, or akin, to cash and cannot be treated as mere exchange or barter . In the case before us the books of account of the JVC were not produced. Learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s , such sale cannot come under the purview of the definition of sale . But in the 1941 Act the expression in the course of business is conspicuously absent in the definitions of sale , sale price , dealer or business . Therefore, the ratio of the aforesaid decision has no application. 24.. To reinforce his contention Shri Bose seeks support from an old decision of the Allahabad High Court reported in [1963] 14 STC 275 (Sri Ram Sahai v. Commissioner of Sales Tax). In this case also the court held that where there is sale of business as a whole the sale proceeds do not form the part of the taxable turnover under the U.P. Sales Tax Act, 1948 or the Rules framed thereunder. Shri Gupta, however, points out that the Rules framed therein under the U.P. Act, as appearing in the judgment, itself contains provision for deduction of such sale proceeds from the taxable turnover. He draws our attention to rule 44 which enumerates the types of sales deductible from turnover in calculating the taxable turnover. Clause (f) of the same runs thus: All amounts realised by a dealer on account of the sale of his business as a whole. 25.. But on perusal of the judgment I find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e no order as to costs. L.N. RAY (Chairman).-I agree with the judgment prepared by my learned brother, honourable Mr. J. Gupta. In my opinion also, the present application which is in the nature of a writ application under article 226 of the Constitution of India, should be dismissed. 29.. By the formation agreement dated October 6, 1993, M/s. Caltex Oil Corporation (Caltex), a company incorporated in the USA and M/s. IBP Co. Ltd. (IBP), a company with its registered office at Calcutta, entered into an agreement for incorporation of a Joint Venture Public Limited Company (JVC) in the name of IBP Caltex Limited. One of the terms of the agreement was that after the incorporation, the JVC should acquire from IBP in exchange for shares issued by JVC, the blending plant of IBP at Budge Budge near Calcutta with its plant, building, all machinery and equipment except stocks, stores and other current assets, at the price and terms and conditions approved by the parties. The next agreement is dated July 19, 1994 between IBP and JVC. Clause (8) of that agreement is reproduced below: Upon inspection of the said plant and the verification of necessary records it has been agreed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or transfer dated December 2, 1994 between IBP and JVC. For a limited purpose, I am referring to this document which primarily and exclusively relates to transfer of immovable property. In conformity with the recital in the deed of agreement dated July 19, 1994, the following declaration has been made at the end of clause (8) at internal page 8 of the deed of transfer: It has been also agreed that only the immovable properties are being transferred by this deed. In the said clause (8) the consideration of fixed plant and machinery was shown as Rs. 83.04 lakhs, of movable plant and machinery was shown as Rs. 362.96 lakhs, of furniture and fixtures was shown as Rs. 8.91 lakhs and of motor car was shown as Rs. 1.56 lakhs. 31.. Thus, it is clear that the registered transfer deed dated December 2, 1994 related only to the transfer of immovable properties and was not at all concerned with transfer of movables. According to the agreement dated July 19, 1994, the movables were to be transferred by delivery of possession and if the transfer would attract sales tax, the transferor, i.e., IBP, would pay and discharge the same. On behalf of the applicant reliance was greatly placed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in that document stating whether the sum of Rs. 3,73,00,000 would be covered by any number of shares. The fact that the agreement envisaged possible payment of sales tax indicates that the intention of the parties to the transaction was not for exchange of movables for any quantity of shares, but it was a sale transaction for Rs. 3,73,00,000 which was paid and discharged by a second transaction of acquisition of shares by the transferor. Therefore, the operative part of the agreement dated July 19, 1994 as far as it relates to movable properties, is entirely different from the operative part of the document considered by the Supreme Court in Commissioner of Income-tax v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692; AIR 1968 SC 200. Hence, it cannot be said that the transaction in question was an exchange. I agree with the finding of the honourable Judicial Member that it was a transaction of sale. 32.. The parties also referred to the case of Commissioner of Income-tax, Kerala v. R.R. Ramakrishna Pillai [1967] 66 ITR 725 (SC). The facts of that case were that five persons carried on a business in the name and style of Morning Star Bus Service . The business was tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property it is an exchange . I am inclined to agree with Mr. Gupta that the obligation to pay the price was discharged by allotment of shares in favour of the transferor. This finds support from the fact that shares were separately allotted for immovable properties. 33.. The next point which was argued on behalf of the applicants was whether the transfer of the entire blending plant at Budge Budge to the JVC could attract sales tax, because it was a transfer of the whole unit. It is undisputed that the applicant No. 1 has been engaged in the business of distribution of petroleum, petroleum products and related products (see clause 2 of the formation agreement dated October 6, 1993). This is not a case where the applicant No. 1 transferred all its assets thereby going out of business. Undisputedly it is continuing its business, but it had transferred the blending plant at Budge Budge, of course, excluding stock, stores and other assets (see paragraph 8 of the main application). Hence, even the blending plant was not transferred in its entirety. Stock, stores and other assets were retained by the applicant No. 1. The definition of sale in the Bengal Finance (Sales Tax) Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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