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TMI Blog1968 (8) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1959-60 the Income-tax Officer, Surat, brought to tax under section 10(2)(vii), proviso (ii), of the Income-tax Act, 1922, Rs. 40,743 being the excess realised over the written down value of the machinery. But the Income-tax Appellate Tribunal held, relying upon the decisions in Commissioner of Income-tax v. Sir Homi Mehta's Executors, Rogers Co. v. Commissioner of Income-tax and Commissioner of Income-tax v. Mugneeram Bangur Co., that the firm transferred the machinery only with a view to carry on the business as a company rather than as a firm , and by that transfer no profit in a business sense could be deemed to have resulted to the firm. The following question referred by the Tribunal : Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,743 is assessable to tax by applying the second proviso to section 10(2)(vii)of the Indian Income-tax Act, 1922 ? was answered by the High Court of Gujarat in the negative. The Commissioner of Income-tax appeals with certificate of fitness granted by the High Court. Counsel for the Commissioner contended that the decisions in Sir Homi Mehta's Executors' case, Rogers Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly it is only a readjustment made by certain persons so as to carry on business in one form rather than in another. That view was adopted with some variation in the forms of expression by the Calcutta High Court in Mugneeram Bangur and Company's case, by the Kerala High Court in Commissioner of Income-tax v. Morning Star Bus Service, and by the Madras High Court in M. C. Cherian v. Commissioner of Income-tax. The Patna High Court expressed a different view in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax. The principle which was expounded by the Bombay High Court and adopted by the Calcutta, Madras and Kerala High Courts cannot, in our judgment, be accepted as correct. It is now well-settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as the substance of the matter . In Inland Revenue Commissioners v. Duke of Westminster Lord Russell of Killowen observed at page 524 : ... I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances we are of opinion that it is wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent cannot be read as throwing any doubt on the principle that the true legal relation arising from a transaction alone determines the taxability of a receipt arising from the transaction. The observation is casual, it was not necessary for the purpose of the case, and was apparently recorded without any debate on the question. In Sir Kikabhai Premchand's case a dealer in silver and shares withdrew some silver bars and shares of the business and settled them upon certain trust of which he was the managing trustee. In his books of account he credited the business with the cost price of the bars and shares so withdrawn. The income-tax authorities sought to bring to tax the difference between the cost price of the assets withdrawn and their market value at the date of withdrawal from the business. It was held by this court that no income arose to the assessee as a result of the transfer of shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not propose to express any opinion on the correctness of that view, for, in our judgment, by virtue of the amendment made in section 10(2)(vii), proviso (ii), of the Indian Income-tax Act, 1922, by section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act, 67 of 1949, even under a realization sale excess over the written down value not exceeding the difference between the original cost and the written down value is liable to be brought to tax. In the West Coast Chemicals Industries Ltd.'s case, income received in the accounting year ending April 30, 1944, was sought to be brought to tax and the second proviso to section 10(2)(vii) in the relevant assessment year read as follows : Provided further that where the amount for which any such machinery or plant is sold exceeds the written down value, the excess shall be deemed to be profits of the previous year in which the sale took place. Clause (vii) and the second proviso were amended by Act 8 of 1946, and further amended by Act 67 of 1949. The relevant part of clause (vii) of section 10(2) which falls to be construed in the present case reads as follows : Such profits or gains shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn value was not taxable cannot be accepted. But counsel for the assessee is right in contending that the Tribunal has recorded no finding whether the transfer was of the nature of a sale, and on the materials on the record no answer to the question submitted by the Tribunal can be recorded. By section 10(2)(vii), proviso (ii), excess over the written down value, subject to the maximum prescribed thereby, may be brought to charge to tax only if the building, machinery or plant is sold. This Court pointed out in Commissioner of Income-tax v. R. R. Ramakrishna Pillai that a transaction by which a person carrying on business transfers the assets of that business to another assessable entity may take different forms and may have different legal effects. The assets of a business may be sold at a fixed price to a company promoted by a person who carried on the business ; if the price paid for or attributable to an asset exceeds the written down value of the asset proviso (ii) to section 10(2)(vii) of the Indian Income-tax Act, 1922, would ex facie be attracted. Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would ..... X X X X Extracts X X X X X X X X Extracts X X X X
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