Case: Commissioner Of Income Tax Vs. Mugneeram Bangur &amp; Co

1. This is an appeal by special leave directed against the judgment of the High Court at Calcutta in a reference under S. 66 of the Income Tax Act. The four questions referred to the High Court by the Income Tax Appellate TribunalWhether on the facts and circumstances of this case the Income-tax Officer, Central Circle XIV, Calcutta, was competent to file the appeal before the Tribunal against the order of the Appellate Assistant Commissioner of Income Tax Range A, Calcutta?2. Whether on the facts and circumstances of this case the sum of Rs.2,50,000 represented the surplus on the sale of lands which was the stock in trade of the assessee company or was the value of goodwill alleged to have been transferred?3. Whether on the facts and circumstances of this case by the sale of the whole business concern it could be held that there was taxable profit in the sum of Rs.2,50,000?4. Whether on the facts and circumstances of this case and in view of the findings of the Tribunal that the entire share capital of the vendee company (excepting seven ordinary shares) was taken over by the vendor firm in lieu of the sale price of the business as a whole, there was any profit in the amount of Rs.2,50,000 the same being taxable under the Indian Income TaxThe relevant facts and circumstances are these. The respondent, M/s. Mugneeram Bangur and Co. (Land Department) Calcutta (hereinafter referred to as the vendors) were a firm carrying on the business of land development in Calcutta. By an agreement dated July 7, 1948, the partners of the firm agreed to sell all the business of the said firm to the Amalgamated Development Limited, hereinafter called the vendee, which company was promoted by the partners of the firm. The relevant paragraphs of the said agreement are asWhereas the Vendors have agreed to sell and the company has agreed to purchase all the said business on the basis hereinafter set out.Now it is hereby agreed and declared between the parties as follows:1. The Vendors do hereby agree to sell and the company both hereby agree to purchase. All That the said business with effect from the eight day of July One thousand nine hundred and forty-eight Together with the goodwill of the said business And all stock in trade, fixtures, tools, implements, furniture, fittings and all other articles and things belonging to the said business or in anywise used in the same including the benefit and advantages of all contracts.2. The purchase price shall be Rupees thirty-four lakhs ninety nine thousand and three hundred paid and satisfied by the Company allotting to the Vendors or their nominees seventeen thousand five hundred Redeemable Preference shares of Rupees one hundred each and seventeen thousand four hundred and ninety-three Ordinary shares of Rupees one hundred each in the capital of the Company which will be accepted by the Vendors in full satisfaction of the said purchase price.5. The Company shall undertake and discharge all debts and liabilities of the Vendors including development expenses such as opening out roads, laying out drains and sanitary arrangements providing electricity in the areas and providing a School in Tollygunge for education of Children for which the Vendors have given an undertaking to the Tollygunge Municipality and also the liability of the Vendors in respect of the deposits made with them by various intending purchases of lands but excluding the liabilities of the Vendors for Income tax, Super tax or any other tax or duty on income or revenue in respect of the profits of the business.The sum of Rs.34,99,300 was arrived at in the Schedule thus.1. Land Rs. 12,68,628 7 72. GoodwillRs. 2,50,000 0 03. Motor Car and Lorries Rs. 25,866 8 64. Furniture, Fixture, etc.Rs. 5,244 5 65. Mortgage secured Rs. 17,62,367 6 06. Deposits for purchase of LandRs. 53,500 0 07. Advance paid to pleaders solicitors, contractors stall and other outstandings Rs. 1,83,622 3 68. Cash in Bank Rs. 71,800 1 8Rs. 36,21,020 0 9Less Liabilities Rs. 1,21,729 0 9Rs. 34,99,300 0 04. The consideration of Rs.34,99,300 was paid by allotment of 17,500 Redeemable Preference shares of Rs. 100 each and 17,493 Ordinary shares of Rs.100 each, the allotment being to the vendors partners or their nominees. Thus the vendors received shares of the face value of Rs.34,99,300 for the assets transferred to the company.5. The Income Tax Officer held that the sum of Rs.2,50,000 was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock in trade and not good will as alleged. The Appellate Assistant Commissioner, on appeal held that the said sum of Rs.2,50,000 was the value of the goodwill. He further held that since the transfer was a transfer of business as a going concern the profit was the capital gain and therefore not liable to tax. Relying on Doughty v. Commissioner of Taxes, 1927 AC 327, he held that as "the transfer is a transfer of all assets of the firm to a company the transfer is a capital sales".6. The Income Tax Officer filed an appeal before the Appellate Tribunal. The Appellate Tribunal held that although the sale was the sale of a business as a going concern, the value of the stock could be traced, and, therefore, the profits arising out of the sale was taxable income. Regarding the goodwill, the Tribunaldo not think that there was much value of the goodwill of the business that was transferred. Mugneeram Bangur and Co. was a firm constituting of several partners and Mgneeram Bangur and Co. Land Development was a separate firm consisting of the same partners with, however, different shares in the firm. Mugneeram Bangur and Co. were also carrying on business in lands and buildings along with its activities in other businesses. Our attention was drawn by the Department Representative to the fact that in the case of transfer of lands and buildings of the assessee firm the conveyances were as a rule executed in the name of Mugneeram Bangur and Co. The assessees learned Counsel did not object to this fact. We are therefore accepting it as correct. If so, there was nothing in the name of Mugneeram Bangur and Co. Land Department. The conversion of the said firm into a Company in an entirely different name would also indicate that not much of importance was attached to the name of Mugneeram Bangur and Co. Land Department. In the circumstances, in our opinion, the price paid by the purchase Company was not on the consideration of the goodwill of the vendors but upon taking over the entire going concern and paying the consideration not in money but by allotment of shares. In such circumstances, the surplus was out of the sale of the business as a whole, including the stock in trade of the assessee firm. Since the other assets transferred had definite value which would not increase in value by the process of transfer, the only value that could increase was the value of the stock in hand, that being the land in the present case. In our opinion, therefore, the amount of Rs.2,50,000 was really the excess value of the lands sold along with the otherthe Tribunal dismissed the appeal on the ground that although the vendors were a different entity from the vendee, the first being a partnership and the second being a limited company, the transaction was mere adjustment of the business position of the partners. It further observed that the Income Tax Department was not entitled to take mere book keeping entries as the evidence of any profit in the matter.7. The High Court first answered question No. 4,was no profit in the transaction by which the entire stock in trade and the business of the firm were transferred to the limited company. Again the fact that two outsiders were brought in as directors with seven shares allotted to them out of 39,300 shares makes no difference. In Sir Homi Mehtas case 400 shares out of 6,000 shares were allotted to sir Homi Mehtas sons. Nor again can I see any difference in principle between the case of conversion of business into a private limited company and one in which it is converted into a public limited company if in the later company outsiders are not allotted any sizeable proportion of the shares issued.The High Court felt that this answer was enough to dispose of the matter, but as questions 2 and 3 had been referred, they answered them. Regarding question No. 2, the High Court held that "as the assets of the firm transferred to the company have been itemised and as there can be no question of variation of the figures given in items 3 to 8 in the agreement for sale, it must be held that Rs.2,50,000 shown as the value of the goodwill must be represented by surplus on the sale of lands which was the stock-in-trade of the assessee company". Regarding question No. 3, the High Court held that even if the value of the stock in trade taken over by the assessee was greater than the figure shown therefor in the agreement for sale in view of the answer to question 4, there was no profit which could be taxed.

Court's reasoning:
In our opinion, on the facts of this case it cannot be said that the vendors were carrying on the business of purely buying and selling land. In this case the vendors were engaged in buying land, developing it and then selling it. The agreement itself shows that the vendors had already incurred debts and liabilities for development expenses such as opening out roads, laying out drains and sanitary arrangements, providing electricity and providing for a school.14. It seems to us that in the case of a concern carrying on the business of buying land, developing it and then selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs.2,50,000 attributed to goodwill is added to the cost of land, it is nobodys case that this represented the market value of the land.15. In our view the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of his Court inITR 135 (SC) and Doughtys case, 1927 AC 327   that no part of the slump price is taxable. We, therefore, answer question No. 3 in the negative. As stated before, in view of this answer, it is not necessary to answer questions Nos. 2 and 4.