Appeal No 310 of 1964
Appeal by special leave from the judgment and order dated December 1 3 1961 of the Calcutta High Court in Income tax Reference No 74 of 1956
ND Karkhanis Gopal Singh and RN Sachthey for the appellant
AV Viswanatha Sastrt section Murthy and B P Maheshwari for the respondent
The Judgment of the Court was delivered by Sikri J
This is an appeal by special leave directed the judgment of the High Court at Calcutta in a reference under 612 section 66 of the Income Tax Act
The four questions referred to the High Court by the Income Tax Appellate Tribunal are 1 Whether on the facts and circumstances of this case the Income tax Officer Central Circle XIV Calcutta was competent to file the appeal before the Tribunal against the order of the Appellate Assistant Commissioner of Income Tax Range A Calcutta 2 Whether on the facts and circumstances of this case the sum of Rs 250000 represented the surplus on the sale of lands which was the stock in trade of the assessee company or was the value of goodwill alleged to have been transferred 3 Whether on the facts and circumstances of this case by the sale of the whole business concern it could be held that there was taxable profit in the sum of Rs 250000 4 Whether on the facts and circumstances of this case and in view of the findings of the Tribunal that the entire share capital of the vendee company excepting seven ordinary shares was taken over by the vendor firm in lieu of the sale price of the business as a whole there was any profit in the amount of Rs 250000 the same being taxable under the Indian Income Tax Act The relevant facts and circumstances are these
The respondent Ms Mugneeram Bangur  Co Land Department Calcutta hereinafter referred to as the vendors were a firm carrying on the business of land development in Calcutta
By an agreement dated July 7 1948 the partners of the firm agreed to sell all the business of the said firm to the Amalgamated Development Limited here in after called the vendee which company was promoted by the partners of the firm
The relevant paragraphs of the said agreement are as follows And Whereas the Vendors have agreed to sell and the company has agreed to purchase all the said business on the basis hereinafter set out
Now it is hereby agreed and declared between the parties as follows 1
The Vendors do hereby agree to sell and the company both hereby agree to purchase All That the said business with effect from the eighth day of July One thousand nine hundred and forty eight
Together with the goodwill of the said business And all stock in trade fixtures
tools implements
furniture fittings and all other articles and things belonging to the said business or in any way used in the same including the benefit and advantages of all contracts
613 2
The purchase price shall be Rupees thirty four lakhs ninty nine thousand and three hundred paid and satisfied by the Company allotting to the Vendors or their nominees seventeen thousand five hundred Redeemable Preference shares of Rupees one hundred each and seventeen thousand four hundred and ninetythree Ordinary s hares of Rupees one hundred each in the capital of the Company which will be accepted by the Vendors in full satisfaction of the said purchase price
The Company shall undertake and discharge all debts and liabilities of the Vendors including development expenses such as opening out roads laying out drains and sanitary arrangements providing electricity in the areas and providing a School in Tolly gunge for education of Children for which the Vendors have given an undertaking to the Tollygunge Municipality and also the liability of the Vendors in respect of the deposits made with them by various intending purchasers of lands but excluding the liabilities of the Vendors for Income tax Super tax or any other tax or duty on income or revenue in respect of the profits of the business
The sum of Rs 3499300 was arrived at in the Schedule thus In rupees 1
Laud   1268628 7 7 2
Goodwill 
   250000 0 0 3
Motor Car  Lorries   25866 8 6 4
Furniture Fixture etc    5244 5 6 5
Mortgage secured   7162367 6 0 6
Deposits for purchase of land   53500 0 0 7
Advance paid to pleaders solicitors contractors  staff and other outstanding   183622 3 6 8
Cash in Bank   71800 1 8 3621029 0 9 Less liabilities  121729 0 9 3499300 0 0 614 The consideration of Rs 3499300 was paid by allotment of 17500 Redeemable Preference shares of Rs 100 each and 17493 Ordinary shares of Rs 100 each the allotment being to the vendors partners or their nominees
Thus the vendors received shares of the face value of Rs 3499300 for the assets transferred to the company
The Income Tax Officer held that the sum of Rs 250000 was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock in trade and not goodwill as alleged
The Appellate Assistant Commissioner on appeal held that the said sum of Rs 250000 was the value of the goodwill
He further held that since the transfer was a transfer of business as a going concern the profit was the capital gain and therefore not liable to tax
Relying on Doughty vs Commissioner of Taxes1 he held that as the transfer is a transfer of all assets of the firm to a company the transfer is a capital sales
The Income Tax Officer filed an appeal before the Appellate Tribunal
The Appellate Tribunal held that although the sale was the sale of a business as a going concern the value of the stock could be traced and therefore the profits arising out of the sale was taxable income
Regarding the goodwill the Tribunal observed We do not think that there was much value of the goodwill of the business that was transferred
Mugneeram Bangur  Co was a firm constituting of several partners and Mugneeram Bangur  Co Land Department was a separate firm consisting of the same partners with
however
different shares in the firm Mugneerarn Bangur  Co were also carrying on business in lands and buildings along with its activities in other businesses
Our attention was drawn by the Department Representative to the fact that in the case of transfer of lands and buildings of the assessee firm the conveyances were as a rule executed in the name of Mugneeram Bangur  Co The assessee s learned Counsel did not object to this fact
We are therefore accepting it as correct
If so there was nothing in the name of Mugneerarm Bangur  Co Land Department
The conversion of the said firm into a Company in an entirely different name would also indicate that not much of importance was attached to the name of Mugneeram Bangur  Co Land Department
In the circumstances
in our opinion the price paid by the purchase Core Dany was not on the consideration of the goodwill of the 1927 AC 327
615 vendors but upon taking over the entire going concern and paying the consideration not in money but by allotment of shares
In such circumstances the surplus was out of the sale of the business as a whole including the stock in trade of the assessee firm
Since the other assets transferred had definite value which would not increase in value by the process of transfer the only value that could increase was the value of the stock in hand that being the land in the present case
In our opinion therefore the amount of Rs 250000 was really the excess value of the lands sold along with the other assets
But the Tribunal dismissed the appeal on the ground that although the vendors were a different entity from the vendee the first being a partnership and the second being a limited company the transaction was mere adjustment of the business position of the partners
It further observed that the Income Tax Department was not entitled to take mere book keeping entries as the evidence of any profit in the matter
The High Court first answered question No 4 thus There was no profit in the transaction by which the entire stock in trade and the business of the firm were transferred to the limited company
Again the fact that two outsiders were brought in as directors with seven shares allotted to them out of 39300 shares  makes no difference
In Sir Homi Mehta s case 400 shares out of 6000 shares were allotted to Sir Homi Mehta s sons
Nor again can I see any difference in principle between the case of conversion of business into a private limited company and one in which it is converted into a public limited company if in the latter company outsiders are not allotted any sizeable proportion of the shares issued
The High Court felt that this answer was enough to dispose of the matter but as questions 2 and 3 had been referred they answered them
Regarding question No 2 the High Court held that as the assets of the firm transferred to the company have been itemised and as there can be no question of variation of the figures given in items 3 to 8 in the agreement for sale it must be held that Rs 250000 shown as the value of the goodwill must be represented by surplus on the sale of lands which was the stock in trade of the assessee company
Regarding question No 3 the High Court held that even if the value of the stock in trade taken over by the assessee was greater than the figure shown therefore in the agreement for sale in view of the answer to question 4 there was no profit which could be taxed
616 We may mention that it is not necessary to deal with question No 1 because it was given up before the High Court
Mr Karkhanis learned counsel for the appellant
urges that the Doughty s case1 was wrongly decided in one respect and that the vendors and the vendee being different entities
it is not permissible to tear the corporate veil to see whether the partners of the vendors were the same persons as the shareholders of the vendee
He says that if the veil is not torn then there was a sale by the vendors to the vendee and profits arose out of the sale
Learned counsel for the respondent Mr Viswanatha Sastri says that if the third question is answered in his favour it would not be necessary to deal with the other questions
As we are inclined to answer the third question in the favour of the vendors it is not necessary to deal with the other questions and the arguments addressed in respect of them
The Appellate Tribunal held in this case that the sale was a sale of business as a going concern
This is also apparent from clause 1 of the agreement set out above
If this is so Doughty s case1 applies
The facts in Doughty s case may be conveniently taken from the headnote in that case
In 1920 two partners carrying on business in New Zealand as general merchants and drapers sold the partnership business to a limited company in which they became the only shareholders
The sale was of the entire assets including goodwill the consideration being fully paid shares and an agreement by the company to discharge all the liabilities
The nominal value of the shares being more than the sum to the credit of the capital account of the partnership
in its last balance sheet a new balance sheet was prepared showing a larger value for the stock in trade
The Commissioner of Taxes treated the increase in value so shown as a profit on the sale of the stock in trade and assessed the appellant upon it for income tax under the Land and Income Tax Act 1916 of New Zealand
which imposes the tax on all profits or gains derived from any business
The Privy Council decided the case in favour of the appellant on two grounds the first being that if the transaction is to be treated as a sale there was no separate sale of the stock
and no valuation of the stock as an item forming part of the aggregate which was sold
In connection with this ground Lord Phillimore observed that income tax being a tax upon income it is well established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business or at which it stands in the books does not give rise to as profit taxable to income tax
He further observed that where
however the business consists as in the present case entirely in buying and selling it is more difficult to distinguish between an ordinary and a realization sale the 617 object in either case being to dispose of goods at a higher price than that given for them and thus to make a profit out of the business
The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller saks
This might even be the case if the whole stock was sold out in one sale
Even in the case of a realization sale if there were an item which could be traced as representing the stock sold the profit obtained by that sale though made m conjunction with a sale of the whole concern might conceivably be treated as taxable income
Lord Phillimore concluded with the following observations If a business be one of purely buying and selling
like the present a profit made by the sale of the whole of the stock if it stood by itself might well be assessable to income tax but their view of the facts if it be open to them to consider the facts is the same as that of Stout CJ that is that this was a slump transaction
This Court
in Commissioner of Income tax Kerala vs West Coast Chemicals and Industries Ltd1 understood the Doughty s case2 thus This case shows that where a slump price is paid and no portion is attributable to the stock in 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 be said that there was a trading from which alone profits can arise in business
It follows from the above that once it is accepted that there was a slump transaction in this case
that the business was sold as a going concern
the only question that remains is whether any portion of the slump price is attributable to the stock in trade the learned counsel for the appellant relies on two grounds to support the contention that there is profit attributable to the sale of land which was stock in trade of the vendors
He says first that in the schedule to the agreement the value of land and the value of goodwill and other items is specified
He says that although the amount of Rs 250000 was shown as price of goodwill it was really excess value of the land sold along with other assets
Secondly
he says relying on the passage already cited above from Doghty s case  that the vendors  business was a business of purely buying and selling land
In our opinion
on the facts of this case it cannot be said that the vendors were carrying on the business of purely buying and selling land
In 1 2 1927 AC 327
618 this case the vendors were engaged in buying land developing it and then selling it
The agreement itself shows that the vendors had already incurred debts and liabilities for development expenses such as opening out roads laying out drains and sanitary arrangements providing electricity and providing for a school
It seems to us that in the case of a concern carrying on the business of buying land developing it and then selling it it is easy to distinguish a realisation sale from an ordinary sale and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale
The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold
there is no evidence that any attempt was made to evaluate the land on the date of sale
As the vendors were transferring the concern to a company constituted by the vendors themselves no effort would ordinarily have been made to evaluate the land as on the date of sale
What was put in the schedule was the cost price as it stood in the books of the vendors
Even if the sum of Rs 250000 attributed to goodwill is added to the cost of land it is nobody s case that this represented the market value of the land
In our view the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land
If this is so it is clear from the decision of this Court in Commissioner of Income tax Kerala vs 14lest Coast Chemicals and Industries Ltd1 and Doughty s case2 that no part of the slump price is taxable
We therefore answer question No 3 in the negative
As stated before in view of this answer it is not necessary to answer questions Nos 2 and 4
The appeal is accordingly dismissed with costs
Appeal dismissed
1 46 ITR135
2 1927 AC 327


Summary:
The business of the assessee firm carrying on land development business was sold as a going concern to a company promoted by the assessee s partners
The purchase price included sums for the value of land goodwill etc
The amount shown as the value of the goodwill vas sought to be assessed to income tax on the grounds i that the assessee s business was purely one of buying and selling land and ii the amount was profit attributable to the sale of land which was the stock in trade of the assessee
In appeal to this Court
HELD On the facts of this case it could not be said that the assessees were carrying on the business of purely buying and selling land
They were engaged in buying land developing it and then selling it
The sale was the sale of the whole concern and no part of the slump price was attributable to the cost of the land
If that was so no part of it was taxable
617H 618A E Commissioner of Income tax Kerala vs West Coast Chemical and Industries Ltd and Doughty vs Commissioner of Taxes 1927 AC 327 applied
In the case of a concern carrying on the business of buying land developing it and the selling it is easy to distinguish a realisation sale from an ordinary sale and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale
The mere fact that in the schedule the price of land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold
There was no evidence that any attempt was made to evaluate the land on the date of sale
As the assessees were transferring the concern to a company
constituted by the assessees themselves no effort would ordinarily have been made to evaluate the land as on the date of sale
618B D