Case: Commissioner of Income Tax, Calcutta &amp; Others Vs. Gillanders Arbuthnot &amp; Company &amp; Another

(1) of the agreement in specific terms says that "the existing partner shall sell and the company shall purchase the shares and securities for a sum of Rupees seventyfive lakhs". Clause (3) of that agreement merely provides a mode of satisfaction of the sale price. The sale price fixed by the parties for the shares and the securities sold is 75 lakhs and nothing more. It may be that because of the allotment of the shares of the Company in satisfaction of the sale price, the assessee firm got certain benefits but that does not convert the sale into an exchange. 28. In Commr. of Income-tax Kerala v. R. R. Ramkrishna Pillai, (1967) 66 ITR 725 (SC) this Court distinguishing an exchange from a sale observed that where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale and the true nature of the transaction will not be altered because for the purpose of stamp duty or other reason the value of the assets transferred is shown as equivalent to the face value of the shares allotted. On the other hand a person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay the money consideration shares of certain face value shall be allotted to the transferor. In such a case there are in truth two transactions, one transaction of sale and the other a contract under which the shares are accepted in satisfaction of the liability to pay the price. The fact that as a result of the transfer of the shares of the "Company" to the assessee firm, the latter obtained considerable profits, will not alter the true nature of the transaction - see the decision of this Court in Chittoor Motor Transport Co. (P) Ltd. v. Income-tax Officer, Chittoor, 59 ITR 238 = (AIR 1966 SC 570 ). 29. For the reasons above stated, we have no hesitation in coming to the conclusion that the transaction evidenced by the "agreement for sale" between the company and the assessee was a sale. 30. Now let us see what is the impact of Section 12-B (2) on that transaction ? Under that provision, the amount of capital gains has to be computed after making certain deductions from the full value of the consideration for which the sale is made. What exactly is the meaning of the expression "full value of the consideration for which sale is made" ? Is it the consideration agreed to be paid or is it the market value of the consideration ? In the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore in cases of sales to which the first proviso to sub-section (2) of S. 12-B is not attracted, all that we have to see is what is the consideration bargained for. As mentioned earlier to the facts of the present case, the first proviso is not attracted. As seen earlier, the price bargained for the sale of the shares and securities was only rupees seventyfive lakhs. The facts of this case squarely fall within the rule laid down by this Court in (1967) 66 ITR 622 (SC) (supra). Therein this Court observed :"In a case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share - the full value of the consideration must be taken at the rate of Rupees 136 per share. The view that we have expressed as to the interpretation of the main part of Section 12-B (2) is borne out by the fact that in the first proviso to Section 12-B (2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the Income-tax Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to Section 12-B (2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are (1) that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section 12-B. If the conditions of this proviso are not satisfied the main part of Section 12-B (2) applies and the Income-tax Officer must take into account the full value of the consideration for the transfer". 31. It may be noted that in that case the market value of the shares which were allotted at Rs. 136/- per share was Rs. 620/- per share. 32. Applying the principles enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventyfive lakhs. That being so the capital gains made by the company were Rs. 2,74,772/- as held by the High Court.

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

Explanation:
0[ds]In this case we are dealing with capital gains. Hence the material facts that had to be disclosed were those bearing on capital gains. Though at the time of the original assessment of the assessee, the partnership deed entered into by the five partners was before thex Officer, the sale deed executed by the partners of the assessee firm in favour of the "Company" on February 28, 1947 had not been placed before him. There was no material before thex Officer on the basis of which he could have concluded that the assessee firm had sold any shares and securities to the "Company"; nor was there any material before thex Officer as to the value of those shares and securities as on January 1, 1939. Further no material was placed before him to show that those shares and securities had been sold to the "Company" for a sum of Rs. 75 lakhs. In fact the assessee submitted its return for the assessment year in question in an old form which did not contain Pt. VII which dealt with particulars of income from capital gains. The statement enclosed also did not contain specific particulars about consideration for the sale of goodwill or for the sale of shares of the "Company". It is not without significance that the assessee did not challenge the validity of the proceedings under Section 34 (1) (a) before thex Officer. Even before the Appellate Assistant Commissioner, the only point that appears to have been urged was that since the firm was reconstituted and the reconstituted firm was granted registration under SectionA in the assessment year, it should be presumed that thex Officer while making the original assessment was aware of all the material facts. We agree with the Tribunal and the High Court that there is hardly any doubt that the assessee had failed to disclose fully and truly all material facts for the purpose of ascertaining whether it had made any capital gains or not18. The first question for decision is whether the first proviso to S.B is attracted to the facts of the presentcase.The sale with which we are concerned in this case took place on February 28, 1947. SectionB was incorporated into the Act with effect from April, 1 1947. That being so at the time the sale transaction took place SectionB was not a part of the Act. Hence there is no basis for saying that the "transfer was effected with the object of avoidance or reduction of the liability of the assessee"see Commr. of, West Bengal v. George Hendrson and Co. Ltd., (1967) 66 ITR 622 (SC)19. We have earlier seen that thex Officer in computing the total capital gains had taken into consideration the capital gains said to have been earned as a result of the sale of the shares and securities as well as the goodwill. The Appellate Assistant Commissioner in his order did not say anything specific about any capital gains earned as a result of the sale of the goodwill. The Tribunal rejected the case of the Department that there were any capital gains made as a result of the sale of goodwill. It also rejected the claim of the assessee that there was some capital loss as a result of the sale of goodwill. On this point the High Court agreed with the conclusions reached by the Tribunal. The conclusion of the High Court on this point was not challenged before us either by the Revenue or by the assessee. Therefore there is no need to go into the same20. The first question that we have to decide in this connection is whether the transaction entered into under the agreement for sale dated February 28, 1947 is a sale or exchange or merely areadjustment.It was contended on behalf of the Revenue that it was in effect an exchange though in form it was a sale. According to the assessee, it was a merereadjustment.The Revenue did not contend before the Appellate Assistant Commissioner or the Tribunal or even the High Court that the said transaction was not a sale. It was for the first time before this Court the contention was taken that it was not a sale. The contention of the assessee that it was merely readjustment had been rejected by the authorities under the Act as well as by the High Court21. Properly understood the effect of the contention of the Revenue as well as of the assessee is that in finding out the true nature of a transaction the Court must take into consideration the substance of the transaction and not the legal effect of the agreement entered intoa proposition which receives some support from some of the decided cases. In Sir Kikabhai Premchand v. Commr. ofx (Central), Bombay, 24 ITR 506   = (AIR 1953 SC 509  ) this Court observed that "it is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form"27. Clause (1) of the agreement in specific terms says that "the existing partner shall sell and the company shall purchase the shares and securities for a sum of Rupees seventyfive lakhs". Clause (3) of that agreement merely provides a mode of satisfaction of the sale price. The sale price fixed by the parties for the shares and the securities sold is 75 lakhs and nothing more. It may be that because of the allotment of the shares of the Company in satisfaction of the sale price, the assessee firm got certain benefits but that does not convert the sale into an exchange28. In Commr. ofx Kerala v. R. R. Ramkrishna Pillai, (1967) 66 ITR 725 (SC)   this Court distinguishing an exchange from a sale observed that where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale and the true nature of the transaction will not be altered because for the purpose of stamp duty or other reason the value of the assets transferred is shown as equivalent to the face value of the shares allotted. On the other hand a person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay the money consideration shares of certain face value shall be allotted to the transferor. In such a case there are in truth two transactions, one transaction of sale and the other a contract under which the shares are accepted in satisfaction of the liability to pay the price. The fact that as a result of the transfer of the shares of the "Company" to the assessee firm, the latter obtained considerable profits, will not alter the true nature of the transactionsee the decision of this Court in Chittoor Motor Transport Co. (P) Ltd. v.x Officer, Chittoor, 59 ITR 238   = (AIR 1966 SC 570  )29. For the reasons above stated, we have no hesitation in coming to the conclusion that the transaction evidenced by the "agreement for sale" between the company and the assessee was a sale30. Now let us seewhat is the impact of SectionB (2) on that transaction ?Under that provision, the amount of capital gains has to be computed after making certain deductions from the full value of the consideration for which the sale is made.What exactly is the meaning of the expression "full value of the consideration for which sale is made" ? Is it the consideration agreed to be paid or is it the market value of the consideration ?In the case of sale for a price, there is no question of any market value unlike in the case of an exchange. Therefore in cases of sales to which the first proviso ton (2) of S.B is not attracted, all that we have to see is what is the consideration bargained for. As mentioned earlier to the facts of the present case, the first proviso is not attracted. As seen earlier, the price bargained for the sale of the shares and securities was only rupees seventyfive lakhs. The facts of this case squarely fall within the rule laid down by this Court in (1967) 66 ITR 622 (SC) (supra). Therein this Court observed :"In a case of a sale, the full value of the consideration is the full sale price actually paid. The legislature had to use the words "full value of the consideration" because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs. 136per sharethe full value of the consideration must be taken at the rate of Rupees 136per. The view that we have expressed as to the interpretation of the main part of SectionB (2) is borne out by the fact that in the first proviso to SectionB (2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to thex Officer to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions "full value of the consideration" and "fair market value of the capital asset transferred" and it is provided that if certain conditions are satisfied as mentioned in the first proviso to SectionB (2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are (1) that the transferor was directly or indirectly connected with the transferee, and (2) that the transfer was effected with the object of avoidance or reduction of the liability of the assessee under Section. If the conditions of this proviso are not satisfied the main part of SectionB (2) applies and thex Officer must take into account the full value of the consideration for the transfer"31. It may be noted that in that case the market value of the shares which were allotted at Rs. 136/persharewas Rs. 620/32. Applying the principles enunciated in that decision we think that the full value of the sale price received by the assessee was only rupees seventyfive lakhs. That being so the capital gains made by the company were Rs. 2,74,772/as held by the High Court.