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TMI Blog1962 (10) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... the Cement Agencies Ltd.; and (3) all book and other debts. The consideration for the said sale was agreed to be ₹ 80 lakhs which was to be satisfied by an allotment of 79,993 shares of ₹ 100 each of the Killick Industries Limited and ₹ 700 in cash. In addition to this amount of ₹ 80 lakhs, a certain amount representing a part of the dividend that might be declared by the Cement Agencies Ltd. in respect of the financial year commencing on January 1, 1948, and which was subsequently quantified at ₹ 1,25,378 was also to be paid to the assessee. On January 29, 1948, another agreement was entered into by the partners of the assessee firm with a company called the Killick Nixon and Company Limited, under which they agreed to sell (a) the goodwill ; (b) freehold and leasehold hereditaments ; (c) plants and machinery ; (d) stock-in-trade and book-debts ; (e) Government securities and shares; and (f) full benefit of all shipping and general agencies, distributorships, etc., for a consideration of ₹ 10 lakhs to be satisfied by an allotment of 9,996 shares in the vendee company of ₹ 100 each and ₹ 400 in cash. The transactions as embod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case because the assessee has sold its business lock, stock and barrel and the said section has no application when the business is sold as a whole. It was also contended that the disposal of its assets by the assessee on its dissolution and discontinuance of the business was for the purpose of distribution of its capital assets amongst the partners and consequently, the third proviso to section 12B(1) applied to the present case and the disposal of the assets by the assessee firm could not be treated as a sale of the capital assets for the purpose of section 12B. In addition to these legal contentions, the further contention of the assessee before the Tribunal was that the computation of the capital gains as determined by the income-tax authorities was wrong and that on a proper valuation of the assets as on January 1, 1939, the assessee firm had suffered a capital loss by its sale of the assets on February 1, 1948. The Tribunal did not accept any of the contentions raised by the assessee before it. It held that the assessee was not entitled to the benefit of section 25(3): that section 12B applied to the assessee's case and the assessee was not entitled to the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her expressed the view that even if the business was to be valued as a whole, since a valuation on that basis would have to be done both as on January 1,1939, as well as on February 1,1948, the result of such valuation would not affect the assessment made by the income-tax authorities. In the view that the Tribunal had taken of the several contentions raised before it, the Tribunal dismissed the appeal of the assessee. The assessee applied under section 66(1) requesting the Tribunal to raise certain questions and refer them to the High Court. On the said application, the Tribunal raised the following two questions and referred them to this court : (1) on the facts and circumstances of the case, the assessee firm is entitled to the benefit contained under section 25(3) in respect of capital gains assessed to tax under section 12B of the Income-tax Act? (2)Whether on the facts and in the circumstances of the case, the assessee firm is liable to pay capital gains tax in respect of profits and gains arising from the sale of its assets to the limited companies? The assessee took out a notice of motion before this court praying for directions requiring the Tribunal to raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from business, but it is not necessary that it must be income which is computed under section 10. Income from business within the meaning of section 25(3) may also be capable of computation under some other head. He has in that connection relied upon a decision of this court in Commissioner of Income-tax v. Chugandas Co [1960] 38 ITR 241 . In that case the question was whether the interest received on securities held by the assessee as its stock-in-trade formed part of the assessee's business income for the purpose of claiming relief under section 25(3) and it was held by this court that it formed such income and the assessee was entitled to the benefit of the said provision of section 25(3). The view taken in that case was that the expression business under section 25(3) only referred to the activity, which was styled business and the exemption from the payment of tax was in connection with the income, profits and gains derived from that activity of business irrespective of the head or heads under which such income, profits and gains were required to be shown under the provisions contained in the Indian Income-tax Act. The securities held by the assessee in that case c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax v. Express Newspapers Ltd. [1960] 40 ITR 38 the Madras High Court held : the words 'profits and gains of a business' had a distinct meaning under the Income-tax Act and they could not include another equally distinct concept recognised by the Act, viz., a capital gain. The question which arose in that case was whether the income, profits and gains of the business referred to in section 26(2) would include a capital gain and the question was answered in the negative. The capital gain in that case had arisen on the disposal of a part of the machinery used for the purpose of the business. The case in Commissioner of Income- tax v. Chugandas Co. ( Securities) [1960] 38 ITR 241 was cited to the court in support of the submission that the capital gain would be regarded as a part of the income, profits and gains of the business. The case was distinguished, as we have distinguished it, and the learned judges observed that they were not prepared to read the decision in the case as laying down that the words income, profits and gains of a business would include profits not merely of the business, etc., as such but also those falling under distinct heads of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecie of the assets by the assessee firm amongst its partners in the present case. The third proviso to section 12B(1) cannot, therefore, apply to the present case. Our answer, therefore, to the second question would be that the assessee is not saved from paying capital gains tax in respect of the profits and gains arising from the sale of its assets to the limited companies by reason of the provisions of the third proviso to section 12B(1). We now come to question No. 3, which is first of the two additional questions raised on the further statement submitted by the Tribunal under section 66(2). The contention of Mr. Palkhivala is that section 12B(1) will not apply where there is a transfer of the business lock, stock and barrel. According to him in order that section 12B(1) may come into operation, there must be a transfer of capital assets as such. Where the entire business as a whole is disposed of including the capital assets held for the purpose of its business, it is not a sale or transfer of the capital assets as such but it is a sale or transfer of the business itself. Section I2B(1), therefore, will not apply to such cases. In our opinion, the argument cannot be ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 90 lakhs. It was found by the income-tax authorities that although the consideration under the agreements with the two companies totalled to ₹ 90 lakhs, the assessee firm had, as a matter of fact, realised as the full value of the consideration a sum of ₹ 1,16,75,108. This position was not disputed by the assessee also and, therefore, before the Appellate Assistant Commissioner and the Tribunal it was common ground between the parties that the full value of the consideration arising to the assessee from the transfer of its assets was ₹ 1,16,75,108. Under section 12B(2) the capital gain had to be computed by deducting from the full value of the said consideration either the actual cost of the assets to the assessee or at the option of the assessee of the fair market value of the said assets as on January 1, 1939. The assessee had placed before the income-tax authorities considerable material for the purpose of determining the valuation of the assets as on January 1, 1939. This consisted of the affidavit of one Hartley, a partner in the assessee firm, along with his statement of valuation for the assets of the assessee firm as on January 1, 1939. There was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no capital gain to the assessee since this valuation was more than the value of the full consideration, which had been received by the assessee in 1948. These valuations, however, were not accepted by the Appellate Assistant Commissioner and he proceeded to determine the value of the three items, viz., the managing agencies, the shares of the Cement Agencies Limited and the goodwill of the assessee's business. He adopted the basis of ascertaining the value of each of the managing agencies by ascertaining the average yearly commission immediately prior to January 1, 1939, obtained by the assessee from each of the managing agencies and then capitalising it on the basis of a tax-free yield of six per cent. As to the goodwill and the shares of the Cement Agencies, he did not accept the affidavit of Mr. Captain or his evidence, but accepted the valuation, which the Income-tax Officer in his remand report had given to those shares. So far as the goodwill was concerned, he valued it at a sum of ₹ 8 lakhs. On the calculations made by the Appellate Assistant Commissioner, he came to the conclusion that the valuation of these three assets as on January 1, 1939, was ₹ 51,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, was ₹ 1,16,75,108. It was nobody's case that it did not represent the full value of the consideration of the assets. There is a provision under section 12B(2) that if the Income-tax Officer has reason to believe that the full value of the consideration for which the sale, exchange or transfer is made by the assessee, is not the full value of the consideration, he will be entitled, with the prior approval of the Inspecting Assistant Commissioner of Income-tax, to take the fair market value of the capital assets on the date on which the sale, exchange or transfer had taken place. In the present case, the Income-tax authorities have not availed themselves of this provision and it is, therefore, clear that they had no reason to believe that the value of the consideration of the assets received by the assessee was not the full value of the consideration under section 12B(2). It is, therefore, surprising to find that the Tribunal should have taken the view that it was not open to the assessee to take the valuation as on January 1,1939, for the purpose of computation of capital gains and that if the said basis was to be allowed to the assessee, the case would have to be look ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to contend that the market value of these three assets as on January 1, 1939, should be taken for the purposes of computation of the capital gains of the assessee and that its observation that the valuation placed by the department on these several items is reasonable and its further observation that, even if the business was to be valued as a Whole, it could not affect the assessment made are not observations, which are made on a proper application of its mind to the evidence on record. It is clear beyond any doubt that the assessee was entitled to take the fair market value of the three assets, viz. the managing agencies, 240 shares of the Cement Agencies Limited and the goodwill of its business as on January 1, 1939, for the purpose of the computation of the capital gains and the said capital gains, if any, had to be determined by deducting the said valuation as on January 1, 1939, from the full value of the consideration, which the assessee had received and which, it was common ground between the parties, was ₹ 1,16,75,108. The Appellate Assistant Commissioner had proceeded to determine the value of its assets as on January 1, 1939. As against the said valuation arrived a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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