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

1. M/s. Phelps and Company Ltd., was registered as a private limited company on September 30, 1939 to carry on the business of "Clothiers and Tailors". On March 21, 1952 under an order made under S. 11(4) of the Indian Companies Act, 1913 the name of the Company was altered to Messrs. Associated Clothiers Ltd. On the same day a company styled "Messrs Phelps and Co. Ltd" was incorporated. By a written agreement also of the same date the appellant Company agreed to transfer its assets and liabilities to Messrs. Phelps and Co. Ltd., in consideration of allotment of shares of the value of Rs. 12,30.000 of Messrs. Phelps and Co. Ltd., and Rs. 23,291-10-5 payable in cash, and Messrs. Phelps and Co. Ltd., taking, over liabilities of the appellant Company of the aggregate amount of Rs. 6,05,601-0-6. Under the terms of the agreement the appellant Company purported to transfer seven items of property described in the Schedules annexed to the deed : one of the properties so agreed to be transferred was described in the second schedule - a building at Cannaught Place, New Delhi, valued at Rs. 2,24,673 No deed of conveyance was executed in pursuance of the agreement. It is, however, common ground that on July 1. 1952, Messrs. Phelps and Co. Ltd. took over possession of the properties agreed to be sold2. The original cost of the building described in the second schedule was Rs. 97,258 and the written down value of the building after deducting depreciation allowed from time to time in the records of the Income-tax Officer was Rs. 57,011. In the balance sheet of the appellant Company dated March 31 1958 the building was valued at Rs. 2,24,673 the price for which it was agreed to be sold. In proceedings for assessment for the account year 1952-53 the Income-tax Officer, Companies District IV, Calcutta, brought to tax the difference between the original cost and the written down value of the building on the date of the transfer as deemed profit of the appellant Company under the second proviso to S. 10 (2) (vii) of the Indian Income-tax Act, 1922 . Before the Appellate Tribunal it was contended that the sale of assets to the appellant Company was "in substance to self" and on that account no profit had resulted to the Company and the amount sought to be brought to tax was not liable to be included in the Companys profit. The Tribunal relying upon the decision of the Bombay High Court in Commr. of Income-tax, Bombay City v. Sir Homi Mehts Executors, (1955) 28 ITR 928  : (AIR 1956 Bom 415  ) upheld that contention3. At the instance of the Commissioner of Income-tax, Calcutta the following question was referred to the High Court of Calcutta:"Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the sum of Rupees forty thousand two hundred and forty-seven could not be deemed to be profits of the assessee company under second proviso to S. 10(2) (vii) of the Indian Income-tax Act?"TheHigh Court answered the question in the negative. Against the order passed by the High Court, with certificate under S. 66-A(2) of the Indian Income-tax Act, this appeal is preferred.

Reasoning: 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.