TMI Blog1955 (9) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 28,08,281-11-0, the value of the shares of 26 joint stock companies was ₹ 40,97,000 being their market value at the date of the transfer, aggregating to ₹ 69,05,281-11-0. It appears that Sir Homi Mehta had an over-draft account with a bank and he had to pay to the bank a sum of ₹ 9,05,281-11-0. The newly formed company agreed to take over this liability and discharge it, and therefore the total after deducting this sum of ₹ 9,05,281-11-0 came to ₹ 60,00,000. This amount was paid, as it were, to Sir Homi Mehta by allotting to him 6000 fully paid up shares of this company of the face value of ₹ 1000 each. Sir Homi Mehta did not take all these 6000 shares to himself. He took 5600 shares and at his direction the remaining 400 shares were divided between his four sons, each getting 100 shares. The contention of the department was that Sir Homi Mehta sold shares of these 26 joint stock companies to this limited company for ₹ 40,97,000, that these shares cost him ₹ 30,45,017. The result was that he made a profit of the difference between ₹ 40,97,000 and ₹ 30,45,017, i.e., roughly between ₹ 10 lacks and ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantly emphasised by the Advocate- General in this reference between an individual as an entity and a limited company as an entity, and there can be no doubt that in law Sir Homi Mehta and his sons were very different entitles from Sir Homi Mehta Sons Limited. But what the Advocate-General is doing is looking at the matter from a legal aspect, but in truth and in substance the only result of this particular transaction was that Sir Homi Mehta and his sons held these very shares in a different way from the way they held before the transaction was completed. They adopted a different mode, the mode of the formation of the limited company with all its advantages, in order to hold these shares and to deal with these shares and to make profit out of these shares. Let us look at it from a different point of view. Can it be said that in forming this limited company and transferring these shares to it the assessee was undertaking any business activities? Was this transaction a part of his ordinary business? It has been found as a fact that the shares of these 20 joint stock companies were the stock-in-trade of Sir Homi Mehta. Therefore Sir Homi Mehta was a businessman with regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he limited company the significant fact remains, and we shall presently point out how great is the significance of that fact, that the sale is by the vendor to himself As we have pointed out, although it is Sir Homi Mehta and his sons as individuals who are selling these shares, they are selling these shares to themselves constituted as a different legal entity and taking the form of a limited company. It is well established both in English Courts and in our own Courts that there can be no profit subject to tax when there is a sale by a vendor to himself. A vendor cannot make profit out of himself, and therefore the transaction relied upon by the department is not a transaction which was capable of resulting in any profits. (In the first place, it is not a sale, it is merely a transfer of shares by Sir Homi Mehta tot he limited company and in the second place the transfer is solely for the purpose of bringing about a readjustment of their position as the holder of these shares. Instead of holding these shares and doing business in these shares as individuals with all the consequential liabilities, the readjustment is brought about by which Sir Homi Mehta holds these shares as a sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase price and the value of the shares for which the property was exchanged was a profit assessable to income-tax. The first company was not in a position to work the mines and therefore its mining interest was sold to the second company which had a larger capital, and the value of the shares which were transferred to the first company would really depend upon the working of the mines by the second company and the profit made by the second company upon the working of those mines. Therefore in that respect alone there is a striking difference between the facts of that case and the case before us; and Lord Justice Clerk points out in his judgment that the question that has to be determined is whether the gain that has been made is a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit making; and according to the learned Judge it is only in the latter case that the gain is liable to tax; and as we have already pointed out on the facts of this case it is impossible to suggest that what Sir Homi Mehta did was in an operation of business in carrying out a scheme for profit-making. The Advocate-General has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 27 points out that what the assessee company has now got are stocks and securities of an entirely new body, which stocks and shares give it an interest in a different undertaking, an interest in an entirety of an undertaking of which the shares which have disappeared represented an interest only in a very small part. It can surely not be said that by acquiring the shares of the new company Sir Homi Mehta got an interest in any entirely different undertaking. The undertaking of the new company was the same as the undertaking which Sir Homi Mehta was himself carrying on as an individual. Mr. Justice Rowlatt also points out that with regard to the old shares which the company held, there was an end of the old suspense and there was a new starting point with regard to the substituted stocks. Whatever suspense Sir Homi Mehta had with regard to the shares he held and which he transferred to the company continued unabated and there was no new starting point with regard to the shares of the company which he started. The decision in Westminster Bank Ltd. v. Osler [1933] 1 I.T.R. 65 is also a case dealing with substitution of new shares for old shares. In this case the Westminster ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance the idea that the price quoted at the Stock Exchange necessarily represents the true value or the real value of the shares. Another decision of the House of Lords, Gold Coast Selection Trust v. Humphrey [1949] 17 I.T.R. Suppl. 19, was cited for the proposition that in order to value an asset it is not necessary that the asset should be immediately realised, and it is urged that although the shares of the new company which were transferred to Sir Homi Mehta might not have been immediately realisable they had still a value and the value was the value put upon it under the agreement. That proposition cannot be disputed, but as pointed out by Viscount Simon in the judgment at page 26 the Court must be satisfied that the assessee has received a new valuable asset and even though the asset may not be in the shape of money and even though it may not be immediately realisable it can be valued and the difference between the value of this new asset parted with may be computed for the purpose of ascertaining the gain of the asset; but the very basis of the judgment is that the assessee received a new and valuable asset. In the case before us, in our opinion, Sir Homi Mehta did not rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is non-existent. In Kikabhai's case [1963] 24 I.T.R. 506 Sir Kikabhai wanted to make a trust in which not only he himself was interested but also his wife and children. In the case before us the two entities are entirely identical, and, to use the language of the Supreme Court, it is entirely unreal and artificial to treat these two identical entitled as doing business with each other and by means of a fictional sale producing a fair profit which the Income-tax department seeks to tax. Finally, there is a very strong decision of the Privy Council reported in Doughty v. Commissioner of Taxes [1927] A.C. 327, where two partners sold a partnership business to a limited company in which they became the only shareholders. The sale was of their entire assets, including goodwill, the consideration being fully paid shares, and an agreement by the company to discharge all the liabilities. The nominal value of the shares was more than the sum to the credit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ona fide transaction--them the vendor was entitled to charge a lower price or a higher price from the vendee. But it is clear that in such a case Sir Homi Mehta would not suffer any loss merely by reason of valuing the shares at a lower value. Equally he makes no profit by valuing them at a higher rate. It makes not the slightest difference to the position whether Sir Homi Mehta got 6000 shares of the face value of ₹ 1000 each amounting to ₹ 60,00,000 or he got 40000 shares of the face value of ₹ 1000 each amounting to ₹ 40,00,000. This is nothing more than a mere book entry, to use the language of the Privy Council. The value put upon the shares of the new company in no way increases or decreases the real value of what Sir Homi Mehta got, and what he got was the very shares which he purported to transfer to the limited company but held through a limited company and not through himself as an individual. Ultimately the result must depend upon the view that we take as to whether Sir Homi Mehta made any profit or gain in a commercial sense by transferring these shares to the newly formed limited company. In our opinion he did not make any profit or gain and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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