Case: Messrs. Associated Clothiers Ltd Vs. Commissioner Of Income-Tax, Calcutta

the business does not give rise to a sale in a commercial sense. The present is not a case in which persons carrying on business have floated a private limited company and have attempted to readjust their business position. Here is a case in which the assets of one company have been sold to another. The question to which attention must be directed is whether there was by the agreement a transaction of sale in a commercial sense. 11. In a recent judgment of this Court in Chittoor Motor Transport Co. (P) Ltd. v. Income-tax Officer, Chittoor, (1966) 59 ITR 238 : (AIR 1966 SC 570 ) it was held by this Court that where a private limited company transferred some of its assets to a partnership consisting of three shareholders who held the entire issue of shares of the company for a consideration, but the whole business was not transferred. there was in truth a sale within the meaning of Sale of Goods Act and under S. 10(2)(vib) the rebate received by the private limited company would be liable to be forfeited. This Court declined to accept the argument that when the company transferred the vehicles belonging to it to the partnership, there was no commercial transaction. The Court observed at p. 242 (of ITR): (at p. 573 of AIR):"If we look at the resolution dated June : 30, 1959, it is quite clear that it is a sale for consideration of a number of buses by the limited company to the partnership. It would be a sale under the Sale of Goods Act and it would be a sale in any other proper meaning which might be given to the word sale, We are not concerned whether any profit resulted to the assessee but what we are concerned with is whether the assessee had sold or transferred these buses to the partnership. To us the answer seems to be plain that whether the transaction resulted in profit to the company or not, the transaction comes within the purview of the latter part of S. 10(2)(vib)." 12. Counsel for the Company also submitted that the transaction was merely a nominal transaction and the property in the shares remained with the same Company in which it was vested. This contention wag never raised before or decided by the Tribunal, and it does not arise out of the order of the Tribunal. 13. It was then urged that there was no profit to the Company since there was no evidence about the market value of the property transferred and in the absence of any evidence to show that the property was sold for a price exceeding the written down value liability under S. 10(2)(vii) second proviso will not arise. But in the agreement the properties sold were allotted specific values and no attempt was made at any time before the Tribunal to prove that the values so allotted to the various properties were not true. Substantially the whole of the consideration paid by Messrs. Phelps and Co. Ltd. is in the form of shares to the appellant Company, but unless there is evidence that the market value of the shares was lass than their face value, the claim made by the appellant Company must fail. The burden of proving that the consideration for sale of the property was less than what it purports to be under the agreement of sale lay upon the Company and since no attempt was made to prove that fact, the question cannot be raised for the first time in this Court. 14. It was also said that the transfer was a slump sale of the assets and there being no separate sale of the property described in the second schedule, the difference between the written down value and the cost price was not liable to be included as income in the process of assessment. Reliance in this behalf was placed upon the observations of the Judicial Committee of the Privy Council in Doughty v. Commr. of Taxes, 1927 AC 327. In that case two partners carrying on business as general merchants and drapers sold the entire assets and goodwill of the partnership business to a limited company in which they became the only shareholders. 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. The Judicial Committee held that the assessment wet wrongly made since if the transaction was to be treated as a sale there was no separate sale of the stock, and no valuation of it as an item forming part of the aggregate sold. This Court has affirmed the principle in Doughtys case in a recent judgment: Commr, of Income-tax v. Mugneeram Bangur and Co., (1965) 57 ITR 299 AIR 1960) SC 50). 15. That principle has however no application here. In the present case it is true that the entire assets of the appellant Company were sold to Messrs. Phelps and Co. Ltd. There was no separate sale of different items, but the consideration of each item of property sold was expressly mentioned in the agreement of sale. The contention that the transaction of sale was a mere attempt to readjust the business position of the transferor was never raised before the Tribunal and does not arise out of the order of the Tribunal. 16. We decide this appeal on the narrow ground that the appellant Company sold the property in the second schedule for a stated consideration which was not shown to be notional, and since the consideration was in excess of the original cost of the building, the difference was profit within the meaning of S. 10(2)(vii) second proviso.

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

Explanation:
0[ds]We must therefore proceed on the view that there is no evidence before the Tribunal and no finding of the Tribunal that after transferring its assets the appellant Company carried on business14. It was also said that the transfer was a slump sale of the assets and there being no separate sale of the property described in the second schedule, the difference between the written down value and the cost price was not liable to be included as income in the process of assessment. Reliance in this behalf was placed upon the observations of the Judicial Committee of the Privy Council in Doughty v. Commr. of Taxes, 1927 AC 327. In that case two partners carrying on business as general merchants and drapers sold the entire assets and goodwill of the partnership business to a limited company in which they became the only shareholders. 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. The Judicial Committee held that the assessment wet wrongly made since if the transaction was to be treated as a sale there was no separate sale of the stock, and no valuation of it as an item forming part of the aggregate sold. This Court has affirmed the principle in Doughtys case in a recent judgment: Commr, of Income-tax v. Mugneeram Bangur and Co., (1965) 57 ITR 299 AIR 1960) SC 50)15. That principle has however no application here. In the present case it is true that the entire assets of the appellant Company were sold to Messrs. Phelps and Co. Ltd. There was no separate sale of different items, but the consideration of each item of property sold was expressly mentioned in the agreement of sale. The contention that the transaction of sale was a mere attempt to readjust the business position of the transferor was never raised before the Tribunal and does not arise out of the order of the Tribunal16. We decide this appeal on the narrow ground that the appellant Company sold the property in the second schedule for a stated consideration which was not shown to be notional, and since the consideration was in excess of the original cost of the building, the difference was profit within the meaning of S. 10(2)(vii) second provisoThe Tribunal in deciding the appeal before it observed:"Associated Clothiers Ltd., were owners of a business having assets and liabilities. By sale to Phelps and Co. Ltd. they got the entire ownership by way of shares and the same assets and liabilities remained in the hands of Phelps and Co. Ltd."This Court must accept the statement made by the Tribunal in the statement of the case, especially when no objection was raised thereto before the Tribunal or before the High Court on behalf of the appellant Company at any time10. It is unnecessary for the purpose of this case to express any final opinion on the question, whether in taxing cases it is open to the assessing authority to ignore the corporate personality of a company and to hold that the interest of the shareholders in the shares of a company and on the business of the Company is identical, and transfer by the owners of a business to a Company in which the shares are owned by the former owners of the business does not give rise to a sale in a commercial sense. The present is not a case in which persons carrying on business have floated a private limited company and have attempted to readjust their business position. Here is a case in which the assets of one company have been sold to another.The question to which attention must be directed is whether there was by the agreement a transaction of sale in a commercial senseSubstantially the whole of the consideration paid by Messrs. Phelps and Co. Ltd. is in the form of shares to the appellant Company, but unless there is evidence that the market value of the shares was lass than their face value, the claim made by the appellant Company must fail. The burden of proving that the consideration for sale of the property was less than what it purports to be under the agreement of sale lay upon the Company and since no attempt was made to prove that fact, the question cannot be raised for the first time in this Court.