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TMI Blog1962 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... HIDAYATULLAH J.----In this appeal by the Commissioner of Income-tax, Kerala, filed with certificate of the High Court of Kerala, an important question of law was raised before the High Court, which was answered against the department. It arose in the following circumstances. The respondent, the West Coast Chemicals and Industries Ltd. (referred to as the assessee-company) was incorporated in 1937 primarily with the object of acquiring and working the rights, title and interest in a match factory belonging to one A. V. Thomas at Mudical. The memorandum of association of the assessee-company, however, empowered the company to manufacture and deal in acids, alkalis and other chemicals. The assessee-company carried on its business of manufacturing matches till the account year ending on April 30, 1941. Thereafter, the profits from the business became less and less due to war conditions, and the assessee-company began to manufacture plywood chests for tea, paints and lemon-grass oil. These were contemplated by clause (3) of the memorandum of association. On May 9, 1943, the assessee-company entered into an agreement with one Rao Sahib Natesa Iyer for the sale of the lands, buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in a realisation sale after the company had been wound up. The Tribunal found that the business had not completely ceased to exist, since the assessee-company was carrying on manufacturing on behalf of the purchaser, and the sale could not be regarded as a realisation sale after the company was wound up, but had the characteristics of a trading sale. At the request of the assessee-company, however, the Tribunal referred two questions to the High Court for its decision, and they were : " (1) Whether the transaction of sale of the raw materials along with the business, including machinery, plant and premises is a revenue sale and whether, in the facts and circumstances of the case, the sum of Rs. 1,15,259 has been rightly charged to income-tax ? and (2) Whether the decision that the sale of match, machinery and premises was distinct from the sale of chemicals is legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials ? " It may be pointed out that prior to the sale of chemicals to the purchaser, the only evidence of sale of chemicals by the assessee-company was of two transactions. In the first transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this, much support cannot be derived from observations made by learned judges pertaining to the facts of a case, but they do guide one in a true appraisement of the case in hand. In the well-known case of Californian Copper Syndicate v. Harris the difference between the purchase price and the value of the shares for which the property was exchanged was considered as profit assessable to income-tax. There, the company was formed for the purpose of acquiring and reselling mining properties, and though what it had acquired had all been sold or exchanged, the transaction was considered a business transaction falling within the avowed objects of the company. The case has been accepted as decided on these narrow facts in Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer, in which a different conclusion was reached on slightly different facts. There also, the company was formed with the object of acquiring rubber estates and for developing them. Under the memorandum, the company had the power to sell its properties. Two properties having been acquired and the funds having run out, they were sold but at a profit. This profit was considered as an appreciation of capital and not as assessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rival parties before us, and we shall consider them. The Australian case is Commissioner of Taxation (W. A.) v. Newman. A person who carried on business in Western Australia as a pastoralist sold his property including all live-stock and plant, as a going concern. The Commissioner of Taxation for the State apportioned the purchase money in respect of the live-stock, and assessed the amount which was received in excess, as income derived from carrying on a business. The High Court held that the transaction was not during the carrying on of the business or even for the purpose of carrying on the business, but was for the purpose of putting an end to the business, and that thus the excess represented a capital appreciation and not a trading profit. The New Zealand case is Anson v. Commissioner of Taxes. In that case also, a sheep farmer sold his entire stock of sheep. He had the practice of placing on his sheep at the beginning and end of each year an arbitrary value without reference to the actual market value. When he sold his entire stock, a nominal profit of pound 5,000 odd appeared, and he was assessed on it. The Supreme Court held that it was not an accretion to capital b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion was whether they were still carrying on their trade during that period, and whether the profits were thus made in the ordinary course of trade. It was held by the King's Bench Division of the High Court of Justice in Ireland that the sales were not in the ordinary course of trade but were part of the realisation of the trading stock and winding up of the business, and thus not liable to tax. The Court of Appeal in Ireland unanimously reversed the decision of the High Court. Ronan L.J. pointed out that though the taxpayer had retired from business and had decided not to purchase any more stock, he was still carrying on the business of trading in wines and spirits till his existing stocks were exhausted, and, therefore, the excess obtained by him represented profit. On appeal to the House of Lords, it was held that there was evidence on which the Commissioners could arrive at their finding that trading was, in fact, being carried on. Lord Buckmaster, speaking of the facts in that case, observed as follows : " For in truth it is quite plain that right up to the end of 1917 they were engaged in trading which, so far as the external world is concerned, was the ordinary method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the true answer would be the one given by the High Court in the judgment under appeal. There is no doubt, in this case, that the assessee-company was wound up at least in so far as its match manufacture was concerned. That the business of the company was sold as a going concern, and was, in fact, worked by the assessee-company on behalf of the buyer till the entire consideration was paid, makes no difference, because the agreement clearly indicated that the assessee-company was keeping the factory going, not on its own behalf but entirely on behalf of the buyer. One cannot fairly say, therefore, that a sale of the chemicals and raw materials for match manufacture was anything more than a winding up sale, not with a view to trading in chemicals and raw materials but to close down the business and to realise the assets. There was, in fact, no identifiable price for the chemicals and raw materials except by comparing the two prices offered to be paid by the buyer, that is to say, the price without the chemicals and raw materials and the price with them. From that alone, however, it is impossible to infer that the chemicals and raw materials were sold in the ordinary way of business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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