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

1. These ares by certificate. They arise from the decision of the Calcutta High Court in a Reference under Section 66 (1) of the Indianx Act, 1922 (to be hereinafter referred to as the Act). At the instance of the assessee as well as the Commissioner, thex Tribunal B Bench, Calcutta stated a case and submitted as many as five questions to the High Court for obtaining its opinion. Some of the questions referred to the High Court have not been pressed before this Court. Therefore we shall not refer to them. The questions that were pressed before us are :"(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under Section 34 (1) (a) have been validly initiated ?(2) Whether on the facts and in the circumstances of the case, any capital gains within the meaning of SectionB could be said to arise by the transaction involving transfer of the investments held by the assessee to the Company, admission of the Company as a partner in the assessee firm and issue of shares of the Company to the public and2. The High Court answered the first question in the affirmative and in favour of the Revenue. So far as the second question is concerned, it split the same into two questions viz. whether on the facts and in the circumstances of the case any capital gains within the meaning of SectionB could be said to arise by the transaction involving transfer of investments held by the assessee to the Company and whether on the facts and in the circumstances of the case any capital gains within the meaning of SectionB could be said to arise by the admission of the Company as a partner in the assessee firm and issue of shares of the Company to the public ? It answered the first part of the question in the affirmative and in favour of the Revenue and the second part in the negative and against the Revenue. As regards the 3rd question, the High Court opined that on the facts and in the circumstances of the case the capital gains should have been computed at Rs.. Aggrieved by this decision the Commissioner ofx has brought Civil Appeal No. 1452 of 1969 and the assessee has brought Civil Appeal No. 1502 of 19694. For pronouncing on the questionsd it is necessary to set out the material facts. The assessee is a registered firm which was carrying on business mostly as managing agents of number of companies. Till the end of February 1947, the firm consisted of four partners namely (1) A. C. Gladstone; (2) S. D. Gladstone; (3) T. S. Gladstone and (4) Glendye Limited, each of them having 30 per cent, 39 per cent, 30 per cent and 1 per cent shares respectively in the profits of the firm. We are coencerned with the assessment of the assessee firm for the assessment year8 for which the previous year was the financial year ended on March 31, 19475. On February 28, 1947, the assessee firm through its partners entered into an "agreement for sale" of some of the shares and securities held by it in favour of Gillanders Arbuthnot and Co. (to be hereinafter referred to as the "Company") for a sum of Rs. 75 lakhs. The shares and securities sold under the document are enumerated at the foot of the document. Clause (2) of that agreement provides :"In consideration of the sum of Rupees Fourteen Lakhs and Ninety thousand the existing partners shall admit the company as a partner in the firm upon and subject to the partnership deed (a drft whereof has been already approved by the existing partners and the company), the shares of the company in the goodwill and in the profits of the Firm beinge per cent, thereof"6. The only other clause which is relevant for our present purpose is Clause (3) which reads :"The said two sums of Rupees Seventyfive lakhs and Rupees Fourteen lakhs and Ninety thousand payable in accordance with Clauses 1 and 2 hereof shall be paid and satisfied as follows :(a) As to the sum of Rupees Sixtyfour lakhs and Ninety thousand by an allotment to the existing partners or their nominees of sixtyfour thousand and nine hundred Ordinary Shares of rupees one hundred each credited for all purposes as fully paid up(b) As to the sum of Rupees Twentyfive lakhs by an allotment to the existing partners or their nominees of Twentyfive thousand Redeemable Cumulative Preference Shares of Rupees one hundred each credited for all purposes as fully paid up"7. One other document that came into existence on the same day viz. February 28, 1947 is the deed of partnership. That day the assessee firm was reconstituted and a new partnership came into existence. The new partnership consisted of five partners viz. (1) The "company"; (2) A. C. Gladstone; (3) S. D. Gladstone; (4) T. S. Gladstone and (5) Glendye Limited. In this new partnership the "Company" had 99 per cent. share in its profits. The remaining four partners had only 1/4th per cent. share each in the profits of the new partnership8. Before proceeding further, it is necessary to mention that the "Company" was previously a Private Ltd. Company. In 1946, the "Company" applied to the Examiner of Capital Issues for permission to convert itself into a Public Ltd. Company and sell its shares at a premium. Originally the proposal of the "Company" was to sell its shares of the face value of Rs. 100/to the public at a premium of Rs. 145 to Rs. 175/and its preferential share of the face value of Rs. 100/at a premium of Rs. 1 to 5. The Examiner of Capital Issues did not agree to that proposal. Later on after further correspondence, the Examiner of Capital Issues permitted the "Company" to convert itself into a Public Ltd. Co. and offer its ordinary shares of the face value of Rs. 100/to the public at a premium not exceeding Rs. 125/per share and 25,000 Redeemable Cumulative Preference Shares of the face value of Rs. 100/each at premium not exceeding Rs. 5/per share9. We have earlier noticed that a substantial number of ordinary as well as the preference shares were transferred to the assessee firm at its face value10. The original assessment of the assessee firm for the assessment year8 was made on August 28, 1948 on a total income of Rs.. Thereafter thex Officer initiated proceedings under Section 34 (1) (a) on May 2, 1949 and completed the fresh assessment on January 16, 1956 bringing to charge capital gains determined at Rupees. The assessee appealed to the Appellate Assistant Commissioner. It raised various contentions before the Appellate Assistant Commissioner. It is not necessary to refer to those contentions. Suffice it to say for our present purpose that it challenged the validity of the initiation of the proceedings under Section 34 (1) (a) and further it contended that there was no capital gain at all. On the other hand it claimed that it incurred certain capital loss. The Appellate Assistant Commissioner rejected the contention of the assessee that the proceedings under Section 34 (1) (a) were not validly initiated. He came to the conclusion that there were capital gains but he computed the same at Rs.. On further appeal by the assessee the Tribunal came to the conclusion that the capital gains made by the assessee were only Rs.. In the Reference mentioned earlier the High Court came to the conclusion that the capital gains made by the assessee were Rs.

Reasoning: 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.