Case: K.M.S. Reddy, Commissioner of Income Tax, Kerala , Ernakulam Vs. The West Coast Chemicals and Industries Ltd. , Alleppy

refer to a few more cases, which were cited before us. In J. & R. OKane & Co. v. The Commissioners of Inland Revenue ([1922] 12 T.C. 303), 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 ordinary course of trade. It was held by the Kings 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 of The Commissioner of Inland Revenue v. "Old Bashmills" Distillery Co., Ltd. (in Liquidation) ((1926) 12 T.C. 1148) 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 (Kilmarnock), Ltd. v. Cowperthwaite((1914) 13 T.C. 627), 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 Doughtys case ((1927) A.C. 327) 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."7. 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 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.8. 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]This distinction, in our opinion, is a sound one. The only difficulty is in deciding whether a particular 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 incase 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 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 underis 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.