Judgment Case ID: 2375

Judgment:
Appeals Nos. 1919 1920 of 1966. Appeals from the judgment and order dated October 12	 13	 1962 of the Bombay High Court in Income tax Reference No. 2! of 1959. section T. Desai	 0. P. Malliotra	 and 0. C. Mathur	 for the appellant (in C.A. No. 1919 of 1966) and the respondent (in C. A. No. 1920 of 1966). D. Narsaraju and R. N. Sachthey	 for the appellant (in C.A. No. 1920 of 1966) and the respondent (in C.A. No. 1919 of 1966. The Judgment of the Court was delivered by Shah	 J. These are cross appeals from the order passed by the High Court of Bombay recording answers to questions sub mitted in a reference under section 66 of the Indian Income tax Act	 1922. Messrs Killick Nixon & 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	993 shares of the face value of Rs. 100/ each or Killick Industries Ltd. and Rs. 700/ in cash. By another agreement dated January 29	 1948 the assessee agreed to sell to "Killick Nixon & 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	 distributorships 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. 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	 	it Rs. 32	01	747/ . In appeal	 the Appeal 9 7 3 late 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 & Co. Ltd. and had suffered a capital loss of Rs. 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	4Q	272 /. Debiting the loss against the capital (rains 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 section 25(3)) & (4) of the Income tax Act	 1922. The Appellate Tribunal confirmed the	 order passed by the Appellate Assistant Commissioner. The Tribunal drew up a statement of the case and referred two questions numbered (I) & (2) below to the High Court of Judicature at Bombay. Two more questions numbered (3) & (4) were submitted pursuant to the order made by the High Court under section 66(2) of the Act. The questions were : "(1) Whether on the facts and circumstances of the case	 the assessee firm is entitled to the benefit contained under section 2 5 ( 3 ) in respect of capital gains assessed to tax under section 12B of the Income tax Act ? (2) Whether on the facts and in the circumstances of the case	 the assessee firm is liable to pay capital gains in respect of profits and gains arising from the sale of its assets to the limited companies ? (3) Whether section 12B of the Indian Income tax Act	 1922	 at all applied to the applicant 's 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 applicant 's assets on first day of January one thousand nine hundred and thirtynine ?" The 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. The appeal filed by the Commissioner may first be considered. The assessee contended before the Tribunal	 relying upon the evidence on record	 that the value of the managing agencies	 240 9 7 4 shares of the Cement Agencies Ltd. and the goodwill on January 1. 1939 considerably exceeded Rs. 51	4O	8O2/ . The Tribunal observed in paragraph 10 of its judgment "We do not think it is necessary to deal with in detail the evidence produced before the Income tax authorities in respect of the valuation as on 1 1 1939. The stand taken by the assessee	 in our opinion	 is in consistent. A uniform method must be adopted both as on	 the date of the transfer and as on 1 1 1939. It is not open to the assessee to value an asset by applying one method on 1 2 1948 and another on 1 1 1939. " The Tribunal then observed that since the assets were transferred to a company in which the partners of the assessee were interested	 and the transfer was made for a consideration which was less than the market value	 it was not open to the assessee to contend that the market value of the assets on January 1	 1939 should be taken into account; that the assessee was not entitled to reduce the capital gain by adopting the valuation of those assets which had a market quotation and in respect of assets which had no market quotation by adopting the sale price	; and that "if the goodwill of the business on January 1	 1939 was worth Rs. 8 lakhs its value on February 1	 1948 should be higher." The Tribunal recorded its conclusion that : "For the purpose of this appeal	 it is enough to say that if the value of the assets in question was Rs. 46	40	279/ on 1 2 1948	 it could not be higher than Rs. 51	40	802/ as on I. I 1939. Speaking for ourselves	 we think	 the Income tax authorities by allowing the loss of Rs. 4 lakhs have taken a liberal view of the whole question. " The Tribunal also observed "The valuation placed by the Department	 in our opinion	 is reasonable. Even if the business was to be valued is a whole	 it could not affect the assessment made. The valuation has to be done on the same basis both on 1 1 1939 and 1 2 1948." .LM0 The High Court in dealing with the questions referred observed that under the third proviso to section 12B(2)	 of the Income tax Act	 1922 the assessee was entitled to substitute the fair market value 	of the assets as on January 1	 1939	 if the capital assets had been held by the assessee before January 1	 1939 in place of the cost 	of the assets for the purpose of determining the capital gain	 and that it was common ground that the full value of the consideration for which the assets were transferred was Rs. 1	16	75	108/ . The High Court then observed : 97 5 .LM15 "it is clear beyond any doubt that the assessee was entitled to take the fair market value of the three assets	 viz. the managing agencies	 240 shares of the Cement Agencies Limited and the goodwill of its busi. ness as on 1 1 1939 for the purpose of the computation of the capital gains and the said capital gains		 if any	 had to be determined by deducting the said valuation as on 1 1 1939 from the full value of the consideration. 	 which the assessee	 had received and which	 it was common ground between the parties	 was Rs. 1	16	75	108/ . The Appellate Assistant Commissioner had proceeded to determine the value of its assets as on 1 1 1939. As against the said valuation arrived at by the Appellate Assistant Commissioner	 the assessee has raised o@jections before the Tribunal which objections the Tribunal had to consider on their merits. In so far as the Tribunal has failed to do so and has proceeded on the erroneous view	 which it has taken that it was not necessary to deal in detail with the evidence produced before the Income tax authorities	 the Tribunal has clearly misdirected itself and had also not applied its mind properly to the material on record. " Section 12B which was introduced in the Indian Income tax Act	 1922 with effect from the 31st day of March	 1947	 omitting parts not material reads as follows : "(1) The tax shall be payable by an assessee under the bead 'Capital gains ' in respect of any profits or gains arising from the sale	 exchange or transfer of a capital asset effected after the 31st day of March 1946; and such profits and gains shall be deemed to be income of the previous year in which the sale	 exchange or transfer took place (2) The amount of a capital gain ' shall be computed after making the following deductions from the full value of the consideration for which the sale	 exchange or transfer of the capital asset is made	 namely; (i) expenditure incurred solely in connection with such sale	 exchange or transfer; (ii) the actual cost to the assessee of the capital asset	 including any expenditure of a capital nature incurred and home by him in making any additions or alterations thereto	 but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8	 9	 10 and 12. 97 6 Provided that where a person who acquires a capital asset from the assessee	 whether by sale	 exchange or transfer	 is a person with whom the assessee is directly or indirectly connected	 and the Income tax Officer has reason to 'believe that the sale	 exchange or transfer was effected with the object of avoidance or reduction of the liability of the assessee under this section	 the full value of the consideration for which the sale	 exchange or transfer is made shall	 with the prior approval of the Inspecting Assistant Commissioner of Income tax	 be taken to be the fair market value of the capital asset on the date on which the sale	 exchange or transfer tookplace : Provided further. . Provided further that where the capital asset became the property of the assessee before the 1st day of January 1939	 he may	 on proof of the fair market value thereof on the said date to the satisfaction of the	 Income tax Officer	 substitute for the actual cost such fair market value which shall be deemed to be the actual cost to him of the asset	 and which shall be reduced by the amount of depreciation	 if any	 allowed to the assessee after the said date and increased or diminished	 as the case may be	 by any adjustment made under clause (vii) of sub section (2) of section 10;" Computation of the capital gains under section 12B is to be made by deducting from the market value of the consideration of the sale	 exchange or transfer	 expenditure incurred in connection with such sale	 exchange or transfer and the actual cost to the assessee of the capital asset or at his option	 where the capital asset became the property of the assessee before January 1	 1939	 the fair market value of the asset on January 1	 1939. It is open to the Income tax Officer	 if it appears to him	 that with the object of avoidance or reducing of the liability of the assessee to pay tax	 the full value of the consideration for which the sale	 exchange or transfer is made is understated and the person acquiring the capital asset is a person with whom the assessee is directly or indirectly connected	 to determine the fair market value of the capital asset on the date on which the sale	 exchange or transfer tool	 place. The difference between proviso one and proviso three may be noticed. By virtue of the first proviso the Incometax Officer is	 in the conditions set out therein	 entitled to determine the fair market value of the asset at the date of the sale	 exchange or transfer. Under the third proviso	 the assessee when he has exercised the option to adopt the value on January 1	 1939 is	 for computation of the ictual cost to him of an asset 97 7 transferred	 required to prove the fair market value of the asset on January 1. 1939	 when the asset transferred belonged to him before that date. 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 '	 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 oil January 1. 1939	 proved by the assessee to the satisfaction of the Income tax Officer. The Appellate Assistant Commissioner estimated the value of the three assets on January 1	 1939 at Rs. 51	40	802/ . The assessee contended that the evidence on the record showed that the market value exceeded the estimated value. It is 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. Under the scheme of the Incom tax Act	 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 argumerits raised before it by tile parties. The Tribunal apparently did not consider the evidence : it merely recorded a bare conclu. 	ion 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 the evidence. The High Court was	 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 undeir section 66(5) 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 section 12B(2). In the appeal filed by the assessee	 counsel for the assessee has not challenged the finding recorded on questions Nos. (2) & (3) and nothing more need be said in respect of those questions. Counsel claimed that by virtue of section 25(3) of the Indian Incometax Act	 the assessee is exempted from paying tax in the. year in which the business was closed. Reliance is placed upon section 25(3)) 978 of the Indian Income tax Act. It provides	 insofar as it is material "Where any business	 profession or vocation on which tax was at any time charged under the provisions of the Indian Income tax Act	 1918	 (VII of 1918)	 is discontinued	 then	 unless there has been a succession by virtue of which the provisions of sub section (4) have been rendered applicable	 no tax shall be payable in respect of the income	 profits and gains of the period between the end of the previous year and the date of .such discontinuance It is 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 section (4) of section 25 are rendered applicable. Prima facie	 the assessee was entitled to the benefit of section 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. This Court observed in Commissioner of Income tax Bombay City I vs Chugandas and Co.(1) that 'the exemption under section 25(3) is not restricted only to income on which tax was payable under the head "Profits and gains of business	 profession or vocation" under the Act of 1918. Counsel for the assessee contended that even though under the Act of 1918 capital gain was not charged to tax under the Income tax Act	 1922	 as amended in 1947	 since capital. gains earned by the assessee form part of the income of the assessee as defined in section 2(6C) of the Act	 and are on that account exigible to tax as income of the business	 the assessee is entitled to the benefit of exemption prescribed by section 25 (3) of the Act. Counsel for the Commissioner contended that on income earned from business which is discontinued	 the assessee is en titled to exemption from payment of tax for the period during which the business was carried on in the year in which the business was discontinued. He conceded that income which qualifies for exemption is income earned by carrying on business and not merely income computed for purposes of tax under section 10 of the Act. ' but he contended that the exemption does not apply to receipts which are not earned by carrying on the business	 and are only fictionally deemed income for the purpose of the Incometax Act. He said that in any event capital gains cannot be said to be income resulting from the activity styled "business"	 and on that account capital gains are not admissible to exemption under section 25(3) of the Act. (1) ; 979 Chugandas & Company 's case(1) has	 in our judgment	 no application to the present case. In that case the assessee firm was charged to tax on its income from business under the Indian Income tax Act	 1918. The assessee firm discontinued its business on June 30	 1947	 and in respect of interest on securities which formed part of the assessee 's business income	 exemption was claimed under section 25(3). This Court accepted the contention of the assessee. It was observed at p. 338 : "When	 therefore	 section 25(3) enacts that tax was charged at any time on any business	 it is intended that the tax was at any time charged on the owner or any business. If that condition be fulfilled in respect of the income of the business under the Act of 1918	 the owner or his successor in interest qua the business	 will be entitled to get the benefit of the exemption under it if the business is discontinued. The section in terms refers to tax charged on any business	 i.e.	 tax charged on any person in respect of income earned by carrying on the business. Undoubtedly	 it is not all income earned by a person who conducted any business	 which is exempt under sub section (3) of section 25 non business income will certainly not qualify for the privileges. 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 of 1918	 for	 in our view	 capital gains though they are income within the meaning of section 2(6C) as incorporated by Act 7 of 1939	 and modified by Act XXII of 1947	 are not income earned from trading activity carried on by an assessee	 and therefore cannot be admitted to exemption under section 25(31). In Commissioner of Income tax	 Madras vs Express Newspapers Ltd.(1) this Court expounded the true nature of capital gains at p. 202 : "Under that section (section 12B) the tax shall be payable by the assessee under the head 'capital gains ' in respect of any profits or gains arising from the sale of a capital asset effected during the prescribed period. It says further that such profits or gains shall be deemed to be income of the previous year in which the sale etc.	 took place. This deeming clause does not lift the capital gains from the sixth head in section 6 and place it under the fourth head. It only introduces a limited (1) ; (2) 1. T. R. '50 980 fiction	 namely	 that capital gains "accrued will be deemed to be income of the previous year in which the sale was effected. This fiction does not make them the profits or gains of the business. " Capital gains by the definition under section 2(6C) are income	 and they are liable to tax by virtue of section 6 read with section 12B; 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 section 25 (3) and capital gains not being income which arise from trading activity	 they are not entitled to exemption. Both the appeals therefore fail and are dismissed with costs. V.P.S. Appeals dismissed.

Summary:
The assessee firm sold its assets to two companies and discontinued its business with effect from 1st February 1948. For the assessment year 1949 50 the income tax department sought to assess	 under section 12B of the Indian Income tax Act	 1922	 the capital gains made by the asessee. Capital gains under the section are computed	 in a case (a) where there is no dispute about the market value of the asset on the date of transfer and (b) where the assessee has exercised the option under the third proviso to the section to adopt the value of the asset on 1st January 1939 as its actual cost	 by deducting from the market value of the asset on the date of transfer the value of the asset on January 1	 1939. In the present case the department accepted the market value of the assets on February 1	 1948	 the date of transfer	 and estimated the value of the assets on 1st January 1939	 at a certain figure	 and brought to tax the difference between the two	 rejecting the assessee 's claim under section 25(3) to the benifit of exemption from taxability arising from discontinuance of the business. The Appellate Tribunal confirmed the order. It rejected the contention of the assessee that the evidence on the record showed that the market value of some of the assets on 1st January 1939 exceeded the value as estimated by the department and that therefore the capital gains to be taxed would be much less	 by merely recording a bare conclusion that the value of the assets on 1st January 1939 could not be more than the estimated value	 without considering the evidence. The High Court	 on reference	 (1) held against the.assessee that it was not entitled to the benefit under section 25(3)	 and (2) held aginst the department that the Tribunal misdirected itself in not considering the evidence produced before the Income tax Authorities regarding the valuation on 1st January 1939. The assessee and the Commissioner of Income tax appealed to this Court. HELD : (1) It is only income earned by carrying on business that is entitled to exemption under section 25(3). Capital gains	 though by the definition in section 2(6C) are income and liable to tax by virtue of section 6 read with section 12B	 not being income which arises from a trading activity	 are not entitled to such exemption. [98OB C] Commissioner of Income tax	 Bombay City I vs Chugandas & Co. ; and Commissioner of Income tax	 Madras vs Express Newspapers Ltd. 	 referred to. [Whether an assessee was entitled to exemption under section 25(3) in respect of a receipt	 such as capital gains	 which was not chargeable is income under the Income tax Act 7 of 1918	 not decided.] [979E] (2) Under the scheme of the Income tax Act	 the Appellate Tribunal is the final authority on questions of fact. While the onus lies upon the 9 7 2 assessee to prove the market value of the assets on January 1	 1939 the Tribunal	 in disposing of the appeal under section 33(4) of the Act	 is bound to hear the parties and consider the entire evidence produced before the Income tax Authorities. In the present case	 therefore	 the Tribunal bad to determine	 on a consideration of all the evidence	 the value of the assets of the assessee on 1st January 1939. [977E G]