Case: M/S. Killick Nixon &amp; Company Vs. Commissioner Of Income-Tax, Bombay

2. Messrs. Killick Nixon and Co.-hereinafter called the assessee-was a firm which carried on diverse trading activities in Bombay. The assessee agreed to sell on November 28, 1947 to a Company called "Killick Industries Ltd.", the benefit of managing agency contracts held by it, shares of limited Company (including 240 shares of the Cement Agencies Ltd.) and debentures, and book and other debts in consideration of 79,998 shares of the face value of Rs. 100 each of Killick Industries Ltd., and Rs. 700 in cash. By another agreement, dated January 29, 1948 the assessee agreed to sell to "Killick Nixon and Co., Ltd." goodwill of the business of the assessee, freehold and leasehold hereditaments, plant and machinery, stock in trade and book debts, Government securities and shares and full benefit of all shipping and general agencies, distributorship, etc. in consideration of 9,996 shares in the Vendee Company of the face value of Rs. 100 each and Rs. 400 in cash. The assessee was dissolved and its business was discontinued with effect from February 1, 1948.3. In a proceeding for assessment to tax payable by the assessee for the year 1949-50 (the relevant previous year being the year ending June 30, 1948) the Income-tax Officer assessed the capital gains made by the assessee, on the transfer of its capital assets to the two Companies, at Rs. 32,01,747. In appeal, the Appellate Assistant Commissioner modified the order. He was of the view that the assessee had made capital gains amounting to Rs. 25,40,737 by sale of shares to the two companies and other assets transferred to Killick Nixon and Co. Ltd., and had suffered a capital loss of Rupees 4,00,530, being the difference between the market value of the managing agencies, 240 shares of the Cement Agencies Ltd. and the goodwill on January 1, 1939 estimated at Rs. 51,40,802 and the market value of those assets on February 1, 1948 estimated at Rs. 47,40,272. Debiting the loss against the capital gains made by sale of shares, the Appellate Assistant Commissioner brought to tax an amount of Rs. 21,06,455. The Appellate Assistant Commissioner rejected the claim of the assessee to the benefit of S. 25 (3) and (4) of the Income-tax Act, 1922. The Appellate Tribunal confirmed the order passed by the Appellate Assistant Commissioner.4. The Tribunal drew up a statement of the case and referred two questions numbered (1) and (2) below to the High Court of Judicature at Bombay. Two more questions numbered (3) and (4) were submitted pursuant to the order made by the High Court under S. 66 (2) of the Act. The questions wereWhether on the facts and circumstances of the case, the assessee firm is entitled to the benefit contained under S. 25 (3) in respect of capital gains assessed to tax under S. 12-B of the Income-tax Act?(2) Whether on the facts and in the circumstances of the case, the assessee firm liable to pay capital gains in respect of profits and gains arising from the sale of its assets to the limited companies ?(3) Whether S. 12-B of the Indian Income-tax Act, 1922, at all applied to the applicants case ?(4) Whether on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and/or acted without evidence or in disregard of the most material evidence on record in making the valuation of the applicants assets on first day of January one thousand nine hundred and thirty-nineThe High Court answered the first question in the negative, and the second, the third and the fourth questions in the affirmative. The assessee has appealed against the answers recorded on the first three questions; against the order recording the answer on the fourth question, the Commissioner has appealed.

Court's reasoning:
9. There was no dispute in the present case about the market value at the date of the transfer of the assets conveyed. The first proviso, therefore, did not come into play. The dispute related to the value to the assessee on January 1, 1939 of three assets, viz., the managing agencies, 240 shares of the Cement Agencies Ltd. and the goodwill. The capital gain or loss had to be determined by deducting from the market value of the asset on February 1, 1948 the fair market value of those assets on January 1, 1939, proved by the assessee to the satisfaction of the Income-taxis true that the onus lay upon the assessee to prove the fair market value of the assets on January 1, 1939 to the satisfaction of the Income-tax Officer and, therefore, of the Tribunal. The Tribunal did not consider the evidence and disposed of the claim of the assessee after observing that the value of the assets could not exceed the amount at which it was estimated by the Appellate Assistant Commissioner.11. Under the schemeof the IncometaxAct, the Tribunal is the final authority on questions of fact.The Tribunal in deciding an appeal is bound to consider all the evidence, and the arguments raised by the parties. The Tribunal apparently did not consider the evidence; it merely recorded a bare conclusion without setting out any reasons in support thereof. It is, therefore, not possible to say whether the Tribunal considered the evidence and the contentions raised by the assessee ; it cannot be assumed merely because a conclusion is recorded that the Tribunal considered theThe High Courtwas, therefore, right in recording an answer in the affirmative on the fourth question. It will be the duty of the Tribunal in disposing of the appeal under S. 66 (5) (sic) of the Income-tax Act to hear the parties and to determine on a consideration of the evidence the value of the three assets on January 1, 1939 in the light of the third proviso to S. 12-Bis common ground that the assessee was assessed to tax in respect of the income from business under the Indian Income-tax Act 7 of 1918 and the case is not one of succession by virtue of which the provisions of sub-s. (4) of S. 25 are rendered applicable. Prima facie, the assessee was entitled to the benefit of S. 25 (3), i.e., it was exempted from payment of tax in respect of the income, profits and gains earned by carrying on business for the period between the end of the previous year and the date of discontinuance of the business.Chugandas and Co.s case (1965) 55 ITR 17  =(AIR 1965 SC 568  ) has, in our judgment, no application to the present case.It is not necessary for the purpose of these appeals to decide whether an assessee is entitled to exemption under Section 25 (3) in respect of a receipt which was not chargeable as income under the Act d 1918, for, in our view, capital gains though they are income within the meaning of Section 2 (6-C) as incorporated by Act 7 of 1939, and modified by Act 22 of 1947, are not income earned from trading activity carried on by an assessee, and therefore, cannot be admitted to exemption under Sec tion 25gains by the definition under Section 2 (6-C) are income, and they are liable to tax by virtue of S. 6 read with S. 12-B, and if they are not income arising from a trading activity, the benefit of exemption from taxability arising from the discontinuance of the business will not, in our judgment, be available in respect of that head of income. It is only income which is earned by carrying on business which is entitled to exemption under S. 25 (3) and capital gains not being income which arise from trading activity, they are not entitled to exemption.