Appeal No 286 of 1961
Appeal from the judgment and order dated January 27 1960 of the Kerala High Court in I T R Case No 14 of 1955
KN Rajagopal Sastri and D Gupta for the Appellant
SP Desai J B Dadachan  O C Mathur and Ravinder Narain for the respondent
March 20
The Judgment of the Court was delivered by HIDAYATULLAH J
In this appeal by the Commissioner of Income Tax Kerala filed with 962 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 Medical
The Memorandum of Association of the asseesee 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 cl
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 buildings plant and machinery of its match factory for Rs 5 75000
It was agreed that the price would not include manufactured goods chemicals and other raw materials or any other asset not shown in the agreement of sale
The purchaser was allowed sixty days for the payment of the balance of the price Rs 57500 having been already paid at the time the agreement was entered into
The purchaser made a default in payment and on August 9 1943 a fresh agreement was entered into by the parties this time for a consideration of Rs 735000 and the sale included chemicals and paper for manufacture which had not been sold in the first instance
In a confidential report made on August 1 1944 to the shareholders the 963 Directors stated that the price obtained had shown a capital appreciation of about six times the cost price and the sale of chemicals had also resulted in a substantial profit
Meanwhile the assessment of the Company for the account year ending April 30 1944 bad been completed by the Deputy Commissioner of Income tax and the assessee Company had been assessed on an income of Rs 36498 6 4
The Deputy Commissioner of Income tax then issued a notice under section 25 of the Travancore Income tax Act to the Company s Liquidator on the ground that the profits from the sale of the chemicals and paper for manufacture had escaped assessment
The Official Liquidator took up the position that the match manufacturing had been stopped and that business had been wound up and there thus only an appreciation of the capital assets and not a business profit which was liable to assessment
The Deputy Commissioner however relying upon the Memorandum of Association which allowed the assessee Company to manufacture and sell chemicals and on the Directors report held that the assessee Company was liable to income tax on a profit of Rs 2 lakhs arising from this sale
The Commissioner of Income tax on appeal however reduced the assessable profits to Rs 115259
Before the Commissioner the Liquidator admitted that the profit from the sale of the chemicals wits Rs 1 15259
An appeal was then filed before the Income tax Appellate Tribunal at Trivandrum and the assessee Company contented that a stock in trade could only be that which was the subject of trade and that the stock of raw material was not sold in the course of ordinary trading but in a reali sation sale after the Company had been wound up
The Tribunal found that the business had not 964 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 businessincluding machinery plant and premises is a revenue sale and whether in the facts and circumstances of the case the sum of Rs 115254has 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 war ranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials It maybe 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 there was a sale of chemicals on July 24 1943to an educational institution for Rs 50 and another sale on October 30 1943 to a stranger for Rs 7 12 0
The High Court held that by the sale no business was done and that the amount obtained was only by way of realisation sale and was not therefore liable to tax rho argument of the Department also raised before the High Court proceeds in this way
The Department refers to the Memorandum of Association under which the assessee Company was to carry on the business of manufacturing and 965 selling chemicals that in the past it bad sold chemicals that in the first sale of its assets it had excluded chemicals and some other raw materials necessary for the manufacture of matches and had sold the concern for a lesser price that later it included chemicals and raw materials and obtained a larger price and that admittedly there was an identifiable profit of Rs 115259 on the sale of the chemicals and raw materials
The Department therefore contends that the amount of Rs 1 15259 was properly brought to tax as a trading profit
The question therefore is whether there can be said to be a sale in the carrying on of the business in respect of the chemicals and other raw materials
This question is not one easy to decidespecially with the assistance of rulings in which the facts were different
There is a great danger of extracting a principle from the reported cases divorced from the facts
In Halsbury s Laws of England 3rd Edn Vol 20 pp 115 117 there is a list in the footnotes of the cases which have been decided on one side or the other of the dividing line
In the text the law as summarised from the cases is stated as follows  210
Mere realisation of assets is not trading but the completion of outstanding contracts after the dissolution of a firm the commencement of liquidation of a company or the winding up of the affairs of a trader has been held to be trading  211 
The cases illustrating the question arising in such circumstances can be divided into two categories first those where the sales formed part of trading activities and second those where the realisation was not an act of trading
This distinction in our opinion is a sound one
The only difficulty is in deciding whether a particular 966 case belongs to one category or the other
In 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 vs Harris 1 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 Bold or exchanged the transaction was considered a business transaction failing within the avowed objects of the Company
The case has been accepted as decided on these narrow facts in Tebrau Johore Rubber Syndicate Ltd vs Farmer 2 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 Memo randum 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 assessable profit
The difference between these two oases is that whereas in the former though the whole of the property was sold it was sold at a part of trading in the letter the property was sold not as part of trading but on a winding up sale
The Department relies upon Californian Copper Syndicate vs Harris 1while the assesse Company relies upon Tebrau JohoreRubber Syndicate Ltd vs Farmer 2 
These cases were also considered and applied by the Privy Council in Doughty vs Commissioner of Taxes 3 which is relied upon by 1 2 3 967 both sides in view of certain observations of the Privy
Council to which we shall presently refer
In that case there were two partners carrying on business in New Zealand as general merchants
They sold the partnership to a limited company of which they were the only shareholders
The sale was of the entire assets including the goodwill and the price was payable in the shape of fully paid shares in the new company
The nominal value of the shares was more then the capital account as shown in the last balance sheet and the partners prepared a new balance sheet in which a larger value was placed upon the stock in trade
The Income tax authorities in New Zealand treated the difference between the value placed on the stock in trade in the old balance sheet and that placed in the new balance sheet as a profit liable to tax
The Privy Council held that this was wrong pointing out that for profit to arise there must be a trading and that a mere alteration of a book keeping entry was not evidence that there was profit
It also held that the sale was of the entire assets and that the price represented a payment for the entire business without a separate sale or valuation of this stock in trade for purposes of sale
It referred to two cases decided respectively by the Supreme Court of New Zealand and the High Court of Australia in which sales by pastora lists of their flock of sheep had taken place
In the New Zealand case the excess obtained over the book value was treated as assessable profit but in the Australian case it was not
Both the sales were of the entire stock
The Privy Council approved of the Australian case and though it did not ex pressly dissent from the New Zealand case it indicated that it found it difficult to appreciate the decision
These two cases from New  Zealand and Australia were of course relied upon by the rival parties before us and we shall consider them
968 The Australian case is Commissioner of Taxation W A vs Newman II
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 Now Zealand case is Anson vs Commissioner of Taxes 2
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 5000 odd appeared and he was assessed on it
The Supreme Court hold that it was not an accretion to capital but a profit on the sale of the appellant s stock in trade
Sir John Salmond who delivered the judgment of Court observed that the holding of a sheep farmer was not a capital holding but his sheep represented a stock in trade and since every appreciation of a stock in trade represented a profit assessable to income tax it mattered not that the stock in trade was sold at once or from time to time
Of this case the Privy Council in Doughty s case 3 did not say much but enough to cast a doubt upon it
This is what the Privy Council said at p 335
It would be difficult to arrive at the profit in this way if it were the case of a 1 1921 2 2 1922 N7LR 330
3 1927 A C 327
969 farmer in England but the trade of a pastora list is one with which the New Zealand Courts would be familiar and which it would be more easy for the New Zealand Judges than for their Lordships to appreciate
 The Privy Council made a distinction between a sale of the entire stock as a part of trading and a sale of the same stock as a winding up sale
It observed that if the business be one of purely buying and selling a profit made by the sale of the whole of the stock if it stood by itself might well be assessable to income tax
It observed that in Dougherty s case 1 the sale was a slump transaction and was a winding up of the business rather than a trading
The Privy Council further pointed out that there is a difficulty in deciding cases of a business which involve breeding of sheep for the purpose of selling wool This is quite true because the sheep may be regarded as the capital with which the wool which is sold is produced or the sheep with the wool on them may be regarded as the stock in trade
Such a question fortunately does not arise in the present case which can be decided on the narrow ground whether the business was being wound up and the sale a realisation sale or whether trading was going on in spite of the winding up so as to attract tax on profits made
Before we answer this question in relation to the facts of this case we wish to refer to a  few more cases which were cited before us
In J  R O Kane  Co vs The Commissioners of Inland Revenue 2 the appellants carried on business as wine and spirit merchants
They then wished to retire from the business and sent a circular letter to their customers
During the year they sold their bole stock to diverse customers  and the question was whether they were still carrying on their trade during that period and whether the profits were thus made in the 1 1927 AC 327
2 970 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 en of 1917 they were engaged in trading which so far as the external world is concerned was the ordinary method of carrying on trade modified only by arrangements which were merely part of the machinery of business dealing adopted to effect their intention to retire
It may well be accepted that they did so intend  yet the intention of a man cannot be considered as determining what it is that his acts amount to and the real thing that has to be decided here is what were the acts that were done in connection with this business and whether they amount to a trading which would cause the profits that accrued to be profits arising from a trade or business The case was therefore decided on the finding of the special Commissioners for which there was enough material in evidence
Similarly the case 971 of The Commissioner of Inland Revenue vs Old Bashmills Distillery Co Ltd in Liquidation 1 was one decided on a finding in support of which there was evidence
The two cases relied upon by the Department and the assessee Company respectively do not shed any light upon the problem before us  because the central decision in both of them was whether the Commissioners  finding was justified or not
In J and M Craig KilmarnockLtd
vs Cowperthwaite2 the question was how the opening stock should have been valued And whether any profit could be said to have resulted
The Privy Council in Doughty s case 3 remarked about this case as follows There on a transference from one company to another one third of the value of each item other than stock in trade as it stood in the books of the selling company was treated as its value for transfer purpose and the balance of a slump price which with an under taking to discharge liabilities formed the consideration was inferentially attributable to the stock
It was held however in that case that no sum could be pitched upon as the actual price of the stock and no claim to assess a profit could be based upon such a foundation
 This case shows that where a slump price is paid and no portion is attributable to the stock iii trade it may not be possible to hold that there is a profit other than what results from the appreciation of capital
The essence of the matter however is not that an extra amount has been gained by the selling out or the exchange but whether it can fairly 1 2 3 1927 AC 327
972 be said that there was a trading from which alone profits can arise in business
If this test is applied to the present case then 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 material 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 or that the assessee Company was carrying on a trading busi ness
The fact that the clause in the Memorandum gave power to the Company to Bell chemicals cannot be used in this connection because the evidence clearly shows that that clause was never used and the two sales of chemicals through the years were too petty in themselves to afford evidence of a continued or sustained trading In chemicals
In our judgment this was a winding up sale with a view to realising the capital assets of the assessee 973 Company and not a sale in the course of business operations which alone would had attracted tax if profit resulted
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The respondent company was incorporated in 1937 primarily with the object of acquiring and working a match factory
Under the memorandum of association the company was also empowered inter alia to manufacture and deal in chemicals
The business of manufacturing matches was carried on by the company till 1941
Thereafter the profits became less and less due to war conditions
On May 9 1943 the company entered into an agreement with a third party for the sale of the lands buildings plant and machinery of its match factory for Rs 575000
It was agreed that this price would not include manufactured goods chemicals and other jaw materials or any other asset not shown in the agreement of sale
Later a fresh agreement was entered into on August 9 1943 under which the sale included chemicals and paper for manufacture which had not been sold in the first instance and the price was Rs 735000
In a report to the shareholders dated August 1 1944 the Directors stated that the price obtained had shown a capital appreciation of about six times the cost price and that the sale of chemicals had resulted in  substantial profit
In proceedings for assessing income which had escaped assessment the income tax authorities relying upon the memorandum of association which allowed the 961 company to manufacture and sell chemicals and on the Directors  report held that the profit from the sale of the chemicals and other raw materials was liable to income tax on a profit of Rs 200000 which was reduced later to Rs 1 15259
The company claimed that the stock of raw materials was sold not in the course of ordinary trading but only in a realisation sale after the company had been wound up
The evidence showed that the clause in the memorandum of association giving power to the company to sell chemicals was seldom used and that prior to the sale of chemicals to the purchaser two transactions of sale of chemicals for small amounts in 1943 were too petty in themselves to afford evidence of trading in chemicals
Held that though under the second agreement dated August 9 1943 more price was paid the transaction was still a winding up sale and no part of this slump price was identifiable as the price of the chemicals and other raw materials
There was no evidence that before the winding up the company had sold chemicals as part of its business and the two instances cited were too petty in themselves to afford evidence of a continued or sustained trading in chemicals
A winding up sale is not trading or doing business and the sale of the raw materials including the chemicals was not part of any business done
Accordingly the sum of Rs 115259 was not liable to tax
Doughty v Commissioner of Taxes 1927 A C 327 di Cussed and relied on
Case law reviewed