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TMI Blog1970 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... 16, 1946. The nominal capital of the company was Rs. 5 lakhs divided into 5,000 ordinary shares of Rs. 100 each. Clauses 1 and 2 of the agreement read as under : " 1. The vendor sells and the company purchases : First, the goodwill of the said business (with the exclusive right to carry on the business under the name and style of Mumick and represent the company as carrying on such business in continuation of the vendor-firm and in succession thereto, and the right to use any word or words indicating that the business is carried on in continuation of or succession to the said firm) and all trade works connected therewith. Secondly, all the plant, machinery, tools, licences, stores, furniture, to which the vendor is entitled in connection with the said business, as specified in the first schedule hereto. Thirdly, the full benefit of all pending contracts, engagements, and orders in connection with the said business as well as the book debts amounting to Rs. 3,006-12-0 more fully described in the second schedule attached to this agreement. Fourthly, cash balance of the business as on August 31, 1946, Rs. 1,164-12-0, and balance with the Punjab National Bank Ltd., New Delhi, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tum of such gains ? " It was felt that a specific enquiry be made to find out the market value of the assets shown at the time of the transaction and the actual quantum of gain. The case was, accordingly, remanded to the Appellate Assistant Commissioner for making the enquiry. The Appellate Assistant Commissioner thereafter submitted a report, the concluding part of which reads as under : " To sum up, the market value of the assets transferred by the appellant to Messrs. Mumick (P.) Ltd. as on the date of transaction was in my view the same as disclosed and there are no reasons to conclude that the sale value was notional and excessive. This being the position, the market value of the shares as on the date of transaction would be the same as the face value, i.e. Rs. 100 per share. " After the receipt of the report of the Appellate Assistant Commissioner, the Tribunal discussed the matter and made the following observation : " 5. Finally, we would look at this question from another point of view. Was there any gain in the transaction ? We felt the validity of this argument and it is for this reason that we obtained the remand report on the valuation of the shares on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the purpose of section 12B of the Act. There is, in our opinion, no force in the above contention. A company from a juristic point of view is a legal personality ; it is wholly distinct from its members and is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. As observed by Lord Russell of Killowen in the case of E. B. M. Co. Ltd. v. Dominion Bank : " They believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained, between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand. " In the case of John Foster Sons Ltd. v. Commissioners of Inland Revenue Lindley L.J., while dealing with the question whether a deed was a conveyance on sale for the purpose of stamp duty, observed : " Now the document in this case is an indenture made between eight gentlemen of the first eight parts, and 'John Foster Sons Ltd. (hereinafter called " the company ") of the 9th part ". Pausing there for a moment : although the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Star Bus Service and the Madras High Court in M. C. Cherian v. Commissioner of Income-tax, took a different view. Their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. B. M. Kharwar noted the above conflict of view and expressed their disapproval of the view expounded by the Bombay, Calcutta, Madras and Kerala High Courts. Shah J., speaking for the court, observed : " The taxing authority is entitled and is indeed bound to determine the true legal relation resulting 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'. This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence--oral and documentary--and conduct of the parties to the transaction. " The machinery of a factory belonging to a firm in the above case was transferred to a private limited company. Dealing with the above transfer, the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm, which may have been built up by years of honest work. (See in this connection the decision of the House of Lords in Anna Trego and William Wilson Smith v. George Stratford Hunt). Lawson in his Introduction to the Law of Property has described " goodwill " in the following words : " Goodwill is property of a highly peculiar kind. It is the right to enjoy all the advantages of an established trade connexion. Customers who have been in the habit of dealing with a business will probably continue to do so, even if the business changes hands, and this probability is regarded as so valuable that large sums of money are commonly paid for it. So well-established a head of property is it that its value must be taken into account for purposes of taxation. Yet it is an odd kind of property since only the person who has transferred the goodwill can be placed under a duty to respect it. He indeed can be restrained from soliciting his former customers and he may also agree not to carry on a competing business. But no third party can be restrained from trading in such a way as to reduce the value of the goodwill. Yet as a marketable object, goodwill must be considered a property. " It cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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