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TMI Blog1968 (9) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 75,00,000 ; on payment of a further sum of Rs. 14,90,000 the said limited company was admitted as a partner of the firm, the shares of the company in the goodwill and in the profits of the firm being 99%. The partners of the firm and the shareholders of the company were the same. The aforesaid sum was agreed to be satisfied by allotment of 64,900 ordinary shares of Rs. 100 each, to the then partners and a further allotment of 25,000 redeemable, cumulative and preferential shares of Rs. 100 each to the said the then partners, vendors. The firm was originally assessed with respect to its income for the year 1947-48 on August 28, 1948. About one year before the said order, the deed of partnership admitting the limited company as a partner was registered with the income-tax department on August 8, 1947. The original assessment proceeding was with respect to the year ending on March 31, 1947. No assessment was made with regard to capital gain, if any, made by the assessee-firm by the said sale to the limited company. Hereafter, the phrase " the limited company " would mean " Gillanders Arbuthnot Co. Ltd. ", and the phrase " assessee-firm " would mean the assessee-firm, Messr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial facts required for the purpose of assessments were disclosed by the assessee at the time of original assessment and, therefore, the provision of section 34(1)(a) would not be attracted, and that the Income-tax Officer who issued the notice had merely a different opinion, on the very same facts. The appellate authority was of the opinion, on a consideration of the materials on record, that the assessee failed to disclose all material facts which he admitted later and therefore the Income-tax Officer was quite justified in issuing a notice under section 34(1)(a). It was further urged before the Assistant Commissioner that the transaction was not a sale in the commercial sense and therefore the said provision (section 34) would not apply. The Appellate Assistant Commissioner overruled all these objections and determined the total value of the shares sold to the limited company to be Rs. 2,04,72,500 ; regarding cost price of the said shares, securities and goodwill to the assessee, the appellate authority agreed with the Income-tax Officer and found the same to be Rs. 1,34,63,376 and thus capital gain was found to be Rs. 70,09,124. The result was that the appeal was allowed and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the assessee under the said Act. " We are of the same opinion and we may observe further that the aforesaid decision of this court went to the Supreme Court in appeal, Commissioner of Income-tax v. George Henderson and Co. Ltd., but the said finding of this court was set aside. We are therefore of opinion that question No. 4 be also answered in the affirmative. The First Question. We shall now refer to the first question. " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 34(1)(a) have been validly initiated ? " This question was at the instance of the assessee. The assessment year in question is 1947-48. Dr. Debi Pal says, the law that would govern the assessee with respect to income, profits or gains earned during any year would be the law as on April 1, 1947. In Karimtharuvi Tea Estates Ltd. v. State of Kerala it has been held by the Supreme Court that, " it is well settled that the Income-tax Act as it stands on the 1st day of April in a financial year must apply to the assessment of the year." Section 34 of the Income-tax Act was amended in 1939 and in 1948. We shall, for our pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned under the old section 34. The second part is, that not being done, whether it acquired a vested right not to have the assessment reopened at all. The question whether the right is now barred or not is beyond this reference. We would not allow this question to be raised for more than one reason. Firstly, if the legal proposition, as Dr. Pal states it, is correct and if the assessee had taken the said point before the Income-tax Officer, the Union of India had enough time to issue or cause to be issued another notice under the old section 34, to the assessee. We may remember that the notice was sent on May 2, 1919. Original assessment for the year 1947-48 was completed on August 18, 1948. The Union of India would not now be competent to issue another notice under the old section even if that would be required by law. Hence, the Union of India would lose a valuable right for no fault of itself. It would therefore be improper to allow the assessee to raise this new question or even this new aspect of the question, after a period of 19 years when the other party may have lost a valuable right not because of negligence of itself, but because of negligence or unfair conduct of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Regarding vested right I may now refer to Prashar v. Vasantsen Dwarkadas, where it has been held : " ...an important right accrued in favour of a party, when the remedy against him is barred by the existing law of limitation and such vested right cannot be affected except by express terms used by the statute or the clearest implication flowing therefrom. " A clear provision in the new section 34 is that on a notice under the new section 34, the Income-tax Officer in May, 1949, could reopen any assessment within four years of the assessment year under certain circumstances and within 8 years under certain other circumstances. There, is a clear provision that the Income-tax Officer was authorised to issue a notice under section 34(1)(a) on May 2, 1949, in cases where the previous assessment was for the year 1947-48. I may also refer to Ahmedabad Manufacturing Calico Printing Co. v. S. G. Mehta, Income-tax Officer, where it has been held that, " they (sections 34 and 35) do not create an exemption in favour of the assesssee or grant an absolution on the expiry of the period. The liability is not enforceable but the tax may again be exigible if the bar is removed and the taxpay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant at all, the consideration of such irrelevant facts by the authority concerned would be an error of law. This is held by Das Gupta J. in the Supreme Court, in the case of Calcutta Discount Co. There are legal principles determining relevant facts. The principle regarding the relevancy of facts may be found in the Evidence Act. The Evidence Act may not be applicable in terms. Even though the Income-tax Officer may be a court within the meaning of that Act, the proceeding before him is not quite a " judicial proceeding " but the Supreme Court has considered it to be an administrative one (referred to S. S. Gadgil v. Lal and Co. 2) but even then the principles underlying there sections of the Evidence Act would apply. There is, thus, law determining relevancy of facts. The Tribunal has considered that certain materials were not then disclosed. These materials are relevant matters but, according to Dr. Pal, the said material facts refer to sub section (2) of section 34 and relates to computation. No question of computation according to Dr. Pal arises on the inference of the assessee. It did not disclose those matters as unnecessary ; but as the Tribunal has considered those re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e form of a sale and satisfies prima facie all elements of a sale, no capital gains under section 12B arose out of the transaction because it was a mere readjustment of business relation of the Gladstones who are the partners of the assessee-firm. Dr. Pal refers to the findings of the authorities below and says the partners of the firm and the shareholders of the limited company were the same. The said partners formerly realised their profits through the medium of the firm and after the so-called sale, the same persons would realise their profits in the same business, through the medium of a limited company or, to be more accurate, through the media of the limited company as well as of the firm. For this purpose he refers to the decision in Commissioner of Income tax v. Mugneeram Bangur Co. which is a decision of a Bench of this court. The question there related to the interpretation of section 10(2)(vii). He also refers to the decision of the Bombay High Court in Rogers Co. v. Commissioner of Income-tax and Commissioner of Income-tax v, Sir Homi Mehta's Executors. But we are now concerned with section 12B. Section 12B, at the relevant time, was as follows : " (1) The tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing like that happened within the assessment year. It is therefore urged that this no " transfer, sale or exchange " which gives rise to any " capital gain ". The reason urged is that a transaction by the partners to a company or by one group of partners to a public company sponsored by the said partners were considered to be no transaction in the commercial sense. It was considered in the aforesaid cases to be a mere readjustment of business relation of the parties. It is not necessary to discuss all the cases of the aforesaid type because all those cases are under section 10(2)(vii) where the phrase used by the legislature is " actually sold ", the word sale is there qualified by the word " actually ". The Bombay High Court, while considering this matter in Rogers Co. v. Commissioner of Income-tax or in Commissioner of Income-tax v. Sir Homi Mehta's Executors, had to find out whether there was " actually " a " sale ". In the aforesaid cases under section 10(2)(vii) of the Act there were transfer deeds, and the transfers appeared to be sales but the court had still to enquire whether what appeared prima facie to be a sale was " actually " so. In determining that matter it was h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 12B, the word " actually " is very conspicuous by its absence. In section 10(2)(vii) the phrase is " actually sold " ; in section 12B, the phrase " sale, exchange or transfer " was used but none of them was qualified by the word " actually ". Therefore, the question whether a sale is actually a sale or not, does not arise in section 12B. What is the meaning of the word " actually " does not therefore arise for consideration and it cannot therefore be stated that the phrase " sale, exchange or transfer " must be a sale, exchange or transfer in the commercial sense, not in the legal sense. So the question, whether a sale by the partners of a firm to a limited company where the partners are the shareholders of the company would be considered to be " actually " a " sale " or not, does not arise in this case. In section 12B we have the phrase " sale, exchange or transfer ". In the provisos we get a list of transactions which, though " a sale, exchange or transfer ", would not come within the category of that phrase for the purpose of section 12B. A transfer by a parent limited company to a subsidiary company has been exempted by a provision. A similar transaction by a parent fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the special department of the Government of India, and to railway or water transport administration. The question was whether sales tax would be payable or not in cases of sale to the Ministry of Supplies, Government of India. The answer was such sale would not be exempted ; because the exemptions should be construed strictly and whatever is not included in the language granting exemption shall be excluded from exemption. We are bound by the aforesaid principle of interpretation by the Supreme Court. In such circumstances we do not think it is necessary to discuss all the cases on section 10(2)(vii) which have been relied upon by the learned advocates on either side. We agree with Mr. Pal that the sale in question was a real sale because the real partners transferred to a juristic person, namely, the limited company ; the subject-matter sold was equally real and the consideration for the sale was also real. On the third question Dr. Debi Pal's point may at its highest be stated as follows : No capital gain accrued to the assessee-firm by the aforesaid transaction. The shares and securities were sold by all the partner of the firm, i.e., the firm. The price was stipulated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm were the same ; after such a sale the limited company carried on as usual its business. The question was whether there was a sale where the word used in the statute was " sold " and the Supreme Court in Chittoor Motor Transport Co. (P.) Ltd. v. Income-tax Officer held as follows : "...there was a sale by the company to the partners. The transaction would be a sale under the Sale of Goods Act and it would be a sale in any other proper meaning of the word 'sale'. Whether it resulted in profit or not it came within the purview of section 10(2)(vib). " Similarly, in section 12B where the word used is " a sale " and the transaction satisfied all the elements of a sale, the question is whether there was capital gain or not will depend on computation as in section 12B(2). The second term of the agreement for sale is as follows: " In consideration of the sum of Rs. 14,90,000 the existing partners shall admit the company as a partner in the firm......the share of the company in the goodwill and in the profit of the firm being 99% thereof. " This transaction is not the form of a transfer by the firm. On payment of the aforesaid sum a particular partner was admitted. So far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such reconstitution of the firm which carried on the same business as before will not affect it as an unit for assessment. It would still be same unit (vide Commissioner of Income-tax v. A. W. Figgies Co.). We hold that there was no sale of goodwill by the assessee-firm to the limited company. The two transactions are different. By the sale of shares and securities, the partners and the firm lost them. The purchaser-company joined the firm and the shares and securities might have been available to the firm but they became the property of the limited company and not of the firm. By the transfer of goodwill, the partners lost it but the firm retained it, till dissolution. The Fifth Question. Coming now to the last question regarding the computation of capital gain we have to find out the value of the stocks and shares, sold to the company, we are asked by Mr. Pal to take into consideration the " full value " of the shares of the limited company. Mr. Pal has referred to the following observation of the Supreme Court in Commissioner of Income-tax v. George Henderson Co. Ltd. The expression " full value " of consideration for which sale, exchange or transfer of capital asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value' of the consideration. This 'full value' in the case of a sale means the price without any deduction. " We have held that the proviso to 12B(2) does not apply. Hence the " full value " is Rs. 75,00,000 and the cost price of the shares is admitted by both the lawyers to be Rs. 47,75,988 on January 1, 1939. Hence, capital gain by sale of securities was Rs. 27,04,272. We have already found while considering question No. 3 that there was no sale of the goodwill so far as the assessee-firm is concerned either in form or in substance. The intention was that the firm would retain 100% of its goodwill till it is dissolved and on dissolution the limited company would gain 100% goodwill. So far as the assessee-firm is concerned, goodwill of the firm will be transferred to the limited company on the dissolution of the firm and not before that, but the shares of the then partners in the goodwill were transferred to the limited company to the extent specified; the said partners are not the assessees. Hence, there was no question of capital gain so far as goodwill is concerned on admission of a partner into the firm. We, therefore, answer the fifth question in the negagtive, and hold th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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