Appeals Nos
1919 1920 of 1966
Appeals from the judgment and order dated October 12 13 1962 of the Bombay High Court in Income tax Reference No 2 of 1959
section T Desai 0
P Malliotra and 0
C Mathur for the appellant in CA No 1919 of 1966 and the respondent in C A No 1920 of 1966
D Narsaraju and R N Sachthey for the appellant in CA No 1920 of 1966 and the respondent in CA No 1919 of 1966
The Judgment of the Court was delivered by Shah J
These are cross appeals from the order passed by the High Court of Bombay recording answers to questions sub mitted in a reference under section 66 of the Indian Income tax Act 1922
Messrs Killick Nixon  Co hereinafter called the assessee was a firm which carried on diverse trading activities in Bombay
The assessee agreed to sell on November 28 1947 to a Company called Killick Industries Ltd the benefit of managing agency contracts held by it shares of limited Company including 240 shares of the Cement Agencies Ltd and debentures and book and other debts in consideration of 79993 shares of the face value of Rs 100 each or Killick Industries Ltd and Rs 700 in cash
By another agreement dated January 29 1948 the assessee agreed to sell to Killick Nixon  Co Ltd goodwill of the business of the
assessee freehold and leasehold hereditaments plant and machinery stock in trade and book debts Government securities and shares and full benefit of all shipping and general agencies distributorships etc
in consideration of 9996 shares in the Vendee Company of the face value of Rs 100each and Rs 400 in cash
The assessee was dissolved and its business was discontinued with effect from February 1 1948
In a proceeding for assessment to tax payable by the assessee for the year 1949 50 the relevant previous year being the year ending June 30 1948 the Income tax Officer assessed the capital gains made by the assessee on the transfer of its capital assets to the two Companies it Rs 3201747 
In appeal the Appeal 9 7 3 late Assistant Commissioner modified the order
He was of the view that the assessee had made capital gains amounting to Rs 2540737 by sale of shares to the two companies and other assets transferred to Killick Nixon  Co Ltd and had suffered a capital loss of Rs 400530  being the difference between the market value of the managing agencies 240 shares of the Cement Agencies Ltd and the goodwill on January 1 1939 estimated at Rs 5140802 and the market value of those assets on February 1 1948 estimated at Rs 474Q272 
Debiting the loss against the capital rains made by sale of shares the Appellate Assistant Commissioner brought to tax an amount of Rs 2106455 
The Appellate Assistant Commissioner rejected the claim of the assessee to the benefit of section 253  4 of the Income tax Act 1922
The Appellate Tribunal confirmed the order passed by the Appellate Assistant Commissioner
The Tribunal drew up a statement of the case and referred two questions numbered I  2 below to the High Court of Judicature at Bombay
Two more questions numbered 3  4 were submitted pursuant to the order made by the High Court under section 662 of the Act
The questions were  1 Whether on the facts and circumstances of the case the assessee firm is entitled to the benefit contained under section 2 5  3  in respect of capital gains assessed to tax under section 12B of the Income tax Act  2 Whether on the facts and in the circumstances of the case the assessee firm is liable to pay capital gains in respect of profits and gains arising from the sale of its assets to the limited companies  3 Whether section 12B of the Indian Income tax Act 1922 at all applied to the applicant s case  4 Whether on the facts and in the circumstances of the case the Tribunal misdirected itself in law and or acted without evidence or in disregard of the most material evidence on record in making the valuation of the applicant s assets on first day of January one thousand nine hundred and thirtynine  The High Court answered the first question in the negative and the second the third and the fourth questions in the affirmative
The assessee has appealed against the answers recorded on the first three questions against the order recording the answer on the fourth question the Commissioner has appealed
The appeal filed by the Commissioner may first be considered
The assessee contended before the Tribunal relying upon the evidence on record that the value of the managing agencies 240 9 7 4 shares of the Cement Agencies Ltd and the goodwill on January 1 1939 considerably exceeded Rs 514O8O2 
The Tribunal observed in paragraph 10 of its judgment We do not think it is necessary to deal with in detail the evidence produced before the Income tax authorities in respect of the valuation as on 1 1 1939
The stand taken by the assessee in our opinion is in consistent
A uniform method must be adopted both as on the date of the transfer and as on 1 1 1939
It is not open to the assessee to value an asset by applying one method on 1 2 1948 and another on 1 1 1939
 The Tribunal then observed that since the assets were transferred to a company in which the partners of the assessee were interested and the transfer was made for a consideration which was less than the market value it was not open to the assessee to contend that the market value of the assets on January 1 1939 should be taken into account that the assessee was not entitled to reduce the capital gain by adopting the valuation of those assets which had a market quotation and in respect of assets which had no market quotation by adopting the sale price and that if the goodwill of the business on January 1 1939 was worth Rs 8 lakhs its value on February 1 1948 should be higher The Tribunal recorded its conclusion that  For the purpose of this appeal it is enough to say that if the value of the assets in question was Rs 4640279 on 1 2 1948 it could not be higher than Rs 5140802 as on I I 1939
Speaking for ourselves we think the Income tax authorities by allowing the loss of Rs 4 lakhs have taken a liberal view of the whole question
 The Tribunal also observed The valuation placed by the Department in our opinion is reasonable
Even if the business was to be valued is a whole it could not affect the assessment made
The valuation has to be done on the same basis both on 1 1 1939 and 1 2 1948 LM0
The High Court in dealing with the questions referred observed that under the third proviso to section 12B2 of the Income tax Act 1922 the assessee was entitled to substitute the fair market value of the assets as on January 1 1939 if the capital assets had been held by the assessee before January 1 1939 in place of the cost of the assets for the purpose of determining the capital gain and that it was common ground that the full value of the consideration for which the assets were transferred was Rs 11675108 
The High Court then observed  97 5 LM15 it is clear beyond any doubt that the assessee was entitled to take the fair market value of the three assets viz the managing agencies 240 shares of the Cement Agencies Limited and the goodwill of its busi
ness as on 1 1 1939 for the purpose of the computation of the capital gains and the said capital gains if any had to be determined by deducting the said valuation as on 1 1 1939 from the full value of the consideration
 which the assessee had received and which it was common ground between the parties was Rs 11675108 
The Appellate Assistant Commissioner had proceeded to determine the value of its assets as on 1 1 1939
As against the said valuation arrived at by the Appellate Assistant Commissioner the assessee has raised ojections before the Tribunal which objections the Tribunal had to consider on their merits
In so far as the Tribunal has failed to do so and has proceeded on the erroneous view which it has taken that it was not necessary to deal in detail with the evidence produced before the Income tax authorities the Tribunal has clearly misdirected itself and had also not applied its mind properly to the material on record
 Section 12B which was introduced in the Indian Income tax Act 1922 with effect from the 31st day of March 1947 omitting parts not material reads as follows  1 The tax shall be payable by an assessee under the bead Capital gains  in respect of any profits or gains arising from the sale exchange or transfer of a capital asset effected after the 31st day of March 1946 and such profits and gains shall be deemed to be income of the previous year in which the sale exchange or transfer took place 2 The amount of a capital gain  shall be computed after making the following deductions from the full value of the consideration for which the sale exchange or transfer of the capital asset is made namely i expenditure incurred solely in connection with such sale exchange or transfer ii the actual cost to the assessee of the capital asset including any expenditure of a capital nature incurred and home by him in making any additions or alterations thereto but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8 9 10 and 12
97 6 Provided that where a person who acquires a capital asset from the assessee whether by sale exchange or transfer is a person with whom the assessee is directly or indirectly connected and the Income tax Officer has reason to believe that the sale exchange or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section the full value of the consideration for which the sale exchange or transfer is made shall with the prior approval of the Inspecting Assistant Commissioner of Income tax be taken to be the fair market value of the capital asset on the date on which the sale exchange or transfer tookplace  Provided further 
Provided further that where the capital asset became the property of the assessee before the 1st day of January 1939 he may on proof of the fair market value thereof on the said date to the satisfaction of the Income tax Officer substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset and which shall be reduced by the amount of depreciation if any allowed to the assessee after the said date and increased or diminished as the case may be by any adjustment made under clause vii of sub section 2 of section 10 Computation of the capital gains under section 12B is to be made by deducting from the market value of the consideration of the sale exchange or transfer expenditure incurred in connection with such sale exchange or transfer and the actual cost to the assessee of the capital asset or at his option where the capital asset became the property of the assessee before January 1 1939 the fair market value of the asset on January 1 1939
It is open to the Income tax Officer if it appears to him that with the object of avoidance or reducing of the liability of the assessee to pay tax the full value of the consideration for which the sale exchange or transfer is made is understated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected to determine the fair market value of the capital asset on the date on which the sale exchange or transfer tool place
The difference between proviso one and proviso three may be noticed
By virtue of the first proviso the Incometax Officer is in the conditions set out therein entitled to determine the fair market value of the asset at the date of the sale exchange or transfer
Under the third proviso the assessee when he has exercised the option to adopt the value on January 1 1939 is for computation of the ictual cost to him of an asset 97 7 transferred required to prove the fair market value of the asset on January 1
1939 when the asset transferred belonged to him before that date
There was no dispute in the present case about the market value at the date of the transfer of the assets conveyed
The first proviso therefore did not come into play
The dispute related to the value to the assessee on January 1 1939 of three assets  the managing agencies 240 shares of the Cement Agencies Ltd and the goodwill
The capital gain or loss had to be determined by deducting from the market value of the asset on February 1 1948 the fair market value of those assets oil January 1 1939 proved by the assessee to the satisfaction of the Income tax Officer
The Appellate Assistant Commissioner estimated the value of the three assets on January 1 1939 at Rs 5140802 
The assessee contended that the evidence on the record showed that the market value exceeded the estimated value
It is true that the onus lay upon the assessee to prove the fair market value of the assets on January 1 1939 to the satisfaction of the Income tax Officer and therefore of the Tribunal
The Tribunal did not consider the evidence and disposed of the claim of the assessee after observing that the value of the assets could not exceed the amount at which it was estimated by the Appellate Assistant Commissioner
Under the scheme of the Incom tax Act the Tribunal is the final authority on questions of fact
The Tribunal in deciding an appeal is bound to consider all the evidence and the argumerits raised before it by tile parties
The Tribunal apparently did not consider the evidence  it merely recorded a bare conclu
ion without setting out any reasons in support thereof
It is therefore not possible to say whether the Tribunal considered the evidence and the contentions raised by the assessee it cannot be assumed merely because a conclusion is recorded that the Tribunal considered the evidence
The High Court was therefore right in recording an answer in the affirmative on the fourth question
It will be the duty of the Tribunal in disposing of the appeal undeir section 665 of the Income tax
Act to hear the parties and to determine on a consideration of the evidence the value of the three assets on January 1 1939 in the light of the third proviso to section 12B2
In the appeal filed by the assessee counsel for the assessee has not challenged the finding recorded on questions Nos
2  3 and nothing more need be said in respect of those questions
Counsel claimed that by virtue of section 253 of the Indian Incometax Act the assessee is exempted from paying tax in the year in which the business was closed
Reliance is placed upon section 253 978 of the Indian Income tax Act
It provides insofar as it is material Where any business profession or vocation on which tax was at any time charged under the provisions of the Indian Income tax Act 1918 VII of 1918 is discontinued then unless there has been a succession by virtue of which the provisions of sub section 4 have been rendered applicable no tax shall be payable in respect of the income profits and gains of the period between the end of the previous year and the date of such discontinuance It is common ground that the assessee was assessed to tax in respect of the income from business under the Indian Income tax Act 7 of 1918 and the case is not one of succession by virtue of which the provisions of sub section
4 of section 25 are rendered applicable
Prima facie the assessee was entitled to the benefit of section 253 ie it was exempted from payment of tax in respect of the income profits and gains earned by carrying on business for the period between the end of the previous year and the date of discontinuance of the business
This Court observed in Commissioner of Income tax Bombay City I vs Chugandas and Co1 that the exemption under section 253 is not restricted only to income on which tax was payable under the head Profits and gains of business profession or vocation under the Act of 1918
Counsel for the assessee contended that even though under the Act of 1918 capital gain was not charged to tax under the Income tax Act 1922 as amended in 1947 since capital
gains earned by the assessee form part of the income of the assessee as defined in section 26C of the Act and are on that account exigible to tax as income of the business the assessee is entitled to the benefit of exemption prescribed by section 25 3 of the Act
Counsel for the Commissioner contended that on income earned from business which is discontinued the assessee is en titled to exemption from payment of tax for the period during which the business was carried on in the year in which the business was discontinued
He conceded that income which qualifies for exemption is income earned by carrying on business and not merely income computed for purposes of tax under section 10 of the Act  but he contended that the exemption does not apply to receipts which are not earned by carrying on the business and are only fictionally deemed income for the purpose of the Incometax Act
He said that in any event capital gains cannot be said to be income resulting from the activity styled business and on that account capital gains are not admissible to exemption under section 253 of the Act
1  979 Chugandas  Company s case1 has in our judgment no application to the present case
In that case the assessee firm was charged to tax on its income from business under the Indian Income tax Act 1918
The assessee firm discontinued its business on June 30 1947 and in respect of interest on securities which formed part of the assessee s business income exemption was claimed under section 253
This Court accepted the contention of the assessee
It was observed at p 338  When therefore section 253 enacts that tax was charged at any time on any business it is intended that the tax was at any time charged on the owner or any business
If that condition be fulfilled in respect of the income of the business under the Act of 1918 the owner or his successor in interest qua the business will be entitled to get the benefit of the exemption under it if the business is discontinued
The section in terms refers to tax charged on any business ie tax charged on any person in respect of income earned by carrying on the business
Undoubtedly it is not all income earned by a person who conducted any business which is exempt under sub section 3 of section 25 non business income will certainly not qualify for the privileges
It is not necessary for the purpose of these appeals to decide whether an assessee is entitled to exemption under section 253 in respect of a receipt which was not chargeable as income under the Act of 1918 for in our view capital gains though they are income within the meaning of section 26C as incorporated by Act 7 of 1939 and modified by Act XXII of 1947 are not income earned from trading activity carried on by an assessee and therefore cannot be admitted to exemption under section 2531
In Commissioner of Income tax Madras vs Express Newspapers Ltd1 this Court expounded the true nature of capital gains at p 202  Under that section section 12B the tax shall be payable by the assessee under the head capital gains  in respect of any profits or gains arising from the sale of a capital asset effected during the prescribed period
It says further that such profits or gains shall be deemed to be income of the previous year in which the sale etc took place
This deeming clause does not lift the capital gains from the sixth head in section 6 and place it under the fourth head
It only introduces a limited 1  2 1
T R 50 980 fiction namely that capital gains accrued will be deemed to be income of the previous year in which the sale was effected
This fiction does not make them the profits or gains of the business
 Capital gains by the definition under section 26C are income and they are liable to tax by virtue of section 6 read with section 12B and if they are not income arising from a trading activity the benefit of exemption from taxability arising from the discontinuance of the business will not in our judgment be available in respect of that head of income
it is only income which is earned by carrying on business which is entitled to exemption under section 25 3 and capital gains not being income which arise from trading activity they are not entitled to exemption
Both the appeals therefore fail and are dismissed with costs
VPS Appeals dismissed


Summary:
The assessee firm sold its assets to two companies and discontinued its business with effect from 1st February 1948
For the assessment year 1949 50 the income tax department sought to assess under section 12B of the Indian Income tax Act 1922 the capital gains made by the asessee
Capital gains under the section are computed in a case a where there is no dispute about the market value of the asset on the date of transfer and b where the assessee has exercised the option under the third proviso to the section to adopt the value of the asset on 1st January 1939 as its actual cost by deducting from the market value of the asset on the date of transfer the value of the asset on January 1 1939
In the present case the department accepted the market value of the assets on February 1 1948 the date of transfer and estimated the value of the assets on 1st January 1939 at a certain figure and brought to tax the difference between the two rejecting the assessee s claim under section 253 to the benifit of exemption from taxability arising from discontinuance of the business
The Appellate Tribunal confirmed the order
It rejected the contention of the assessee that the evidence on the record showed that the market value of some of the assets on 1st January 1939 exceeded the value as estimated by the department and that therefore the capital gains to be taxed would be much less by merely recording a bare conclusion that the value of the assets on 1st January 1939 could not be more than the estimated value without considering the evidence
The High Court on reference 1 held against theassessee that it was not entitled to the benefit under section 253 and 2 held aginst the department that the Tribunal misdirected itself in not considering the evidence produced before the Income tax Authorities regarding the valuation on 1st January 1939
The assessee and the Commissioner of Income tax appealed to this Court
HELD  1 It is only income earned by carrying on business that is entitled to exemption under section 253
Capital gains though by the definition in section 26C are income and liable to tax by virtue of section 6 read with section 12B not being income which arises from a trading activity are not entitled to such exemption
98OB C Commissioner of Income tax Bombay City I vs Chugandas  Co  and Commissioner of Income tax Madras vs Express Newspapers Ltd  referred to
Whether an assessee was entitled to exemption under section 253 in respect of a receipt such as capital gains which was not chargeable is income under the Income tax Act 7 of 1918 not decided 979E 2 Under the scheme of the Income tax Act the Appellate Tribunal is the final authority on questions of fact
While the onus lies upon the 9 7 2 assessee to prove the market value of the assets on January 1 1939 the Tribunal in disposing of the appeal under section 334 of the Act is bound to hear the parties and consider the entire evidence produced before the Income tax Authorities
In the present case therefore the Tribunal bad to determine on a consideration of all the evidence the value of the assets of the assessee on 1st January 1939
977E G