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

The respondent, the West Coast Chemicals and Industries, Ltd. (referred to as the assessee Company) was incorporated in 1937 primarily with the object of acquiring and working the- rights, title and interest in a match factory belonging to one A. V. Thomas at Medical. The Memorandum of Association of the asseesee Company, however, empowered the Company to manufacture and deal in acids, alkalis and other chemicals. The assessee Company carried on its business of manufacturing matches till the account year ending, on April 30, 1941. Thereafter, the profits from the business became less and less due to War conditions, and the assessee Company began to manufacture plywood chests for tea, paints and lemon grass oil. These were contemplated by cl. (3) of the Memorandum ofMay, 9, 1943, the assessee Company entered into an agreement with one Rao Sahib Natesa Iyer for the sale of the lands, buildings, plant and machinery of its match factory for Rs. 5, 75, 000. It was agreed that the price would not include manufactured goods, chemicals and other raw materials or any other asset not shown in the agreement of sale. The purchaser was allowed sixty days for the payment of the balance of the price, Rs. 57, 500 having been already paid at the time the agreement was entered into. The purchaser made a default in payment, and on August 9, 1943, a fresh agreement was entered .into by the parties, this time for a consideration of Rs. 7, 35, 000, and the sale included chemicals and paper for manufacture which had not been sold in the first instance. In a confidential report made on August 1, 1944, to the shareholders, the Directors stated that the price obtained had shown a capital appreciation of about six times the cost price, and the sale of chemicals had also resulted in a substantial profit.Meanwhile, the assessment of the Company for the, account year ending April 30, 1944, bad been completed by the Deputy Commissioner of Income-tax, and the assessee Company had been assessed on an income of Rs. 36, 498-6-4. The Deputy Commissioner of Income-tax then issued a notice under s. 25 of the Travancore Income-tax Act to the Companys Liquidator on the ground that the profits from the sale of the chemicals and paper for manufacture had escaped assessment. The Official Liquidator took up the position that the match manufacturing had been stopped, and that business had been wound up, and there thus only an appreciation of the capital assets and not a business profit, which, was liable to assessment. The Deputy Commissioner, however, relying, upon the Memorandum of Association, which allowed the assessee Company to manufacture and sell chemicals, and on the Directors report, held that the assessee Company was liable to income-tax on a profit of Rs. 2 lakhs arising from this sale. The Commissioner of Income-tax on appeal, however, reduced the assessable profits to Rs. 1, 15, 259. Before the Commissioner, the Liquidator admitted that the profit from the sale of the chemicals wits Rs. 1, 15,appeal was then filed before the Income-tax Appellate Tribunal at Trivandrum, and the assessee Company contented that a stock-in-trade could only be that which was the subject of trade, and that the stock of raw material was not sold in the course of ordinary trading but in a reali- sation sale after the Company had been wound up. The Tribunal found that the business had not completely ceased to exist, since the assessee Company was carrying on manufacturing, on behalf of the purchaser, and, the sale could not be regarded as a realisation sale after the Company was wound up, but had the characteristics of a trading sale. At the request of the assessee Company, however, the Tribunal referred two questions to the High Court for its decision, and they were: "(1) whether the transaction of sale of the raw materials along with the business, including machinery, plant and premises is a revenue sale, and whether in the facts and circumstances of the case, the sum of Rs. 1, 15, 254has been rightly charged to income-tax; and (2) whether the decision that the sale of match, machinery and premises, was distinct from the sale of chemicals is legally war- ranted and whether there was legally a single, transaction of the entire match factory inclusive of raw materials?"It maybe pointed out that prior to the sale of chemicals to the purchaser, the only evidence of sale of chemicals by the assessee Company was of two transactions. In the first transaction, there was a sale of chemicals on July 24, 1943, to an educational institution for Rs. 50 and another sale on October 30, 1943, to a stranger for Rs. 7-12-0. The High Court held that by the sale no business was done, and that the amount obtained was only by way of realisation sale and was not, therefore, liable to tax.

Reasoning:
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.