Case: Commissioner Of Income Tax Vs. Mugneeram Bangur &amp; Co

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."11. 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 a 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 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 in a series of gradual and smaller sales. This might even by 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 in 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 C. J. - that is, that this was a slump transaction."12. This Court, in Commissioner of Income-Tax, Keral v. West Coast Chemicals Industries Ltd., 1962-46 ITR 135 (SC) understood the Doughtys case, 1927 AC 327 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 here 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 chump transaction in this case, i.e. 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.13. 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.2,50,000 was shown as price of goodwill, it was really excess value of the land sold alongwith other assets. Secondly, he says, relying on the passage already cited above from Doughtys case, 1927 AC 327 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 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.14. 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.2,50,000 attributed to goodwill is added to the cost of land, it is nobodys case that this represented the market value of the land.15. 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 his Court in 1962-46 ITR 135 (SC) and Doughtys case, 1927 AC 327 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.

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

Explanation:
0[ds]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 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.14. 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.2,50,000 attributed to goodwill is added to the cost of land, it is nobodys case that this represented the market value of the land.15. 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 his Court inITR 135 (SC) and Doughtys case, 1927 AC 327   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.