1959 (12) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Timing of the transfer of business assets.
2. Assessability of capital gains on the sale of goodwill under Section 12B.
3. Market value of shares as consideration for the transfer of assets.

Issue-wise Detailed Analysis:

1. Timing of the Transfer of Business Assets:
The first issue was whether there were materials for the Tribunal to hold that the transfer of the assets of the business to the limited company took place on or after April 1, 1946. The assessee contended that the transfer was made orally on March 31, 1946, rather than on the dates mentioned in the deeds (April 1, 1946, and May 3, 1946). However, the Tribunal found that the transfer of assets occurred on May 3, 1946, based on the evidence, including the company's account books and the executed deeds. The court upheld the Tribunal's finding, noting that there was ample material to support the conclusion that the transfer took place after April 1, 1946. The assessee did not press this contention further.

2. Assessability of Capital Gains on the Sale of Goodwill under Section 12B:
The second issue was whether Rs. 47,207, the capital gain on the sale of goodwill, is assessable under Section 12B of the Indian Income-tax Act. The assessee argued that goodwill, being intangible property, is not a capital asset and thus should not attract tax liability under Section 12B. The Tribunal, however, held that goodwill is a capital asset, despite its intangible nature, and assigned it a value separate from other assets upon transfer. The court agreed with the Tribunal, citing the definition of "capital asset" in Section 2(4A) of the Act as "property of any kind held by the assessee, whether or not connected with the business, profession or vocation," which is broad enough to include intangible assets like goodwill. Therefore, the court answered the second question in the affirmative, confirming that Rs. 47,207, being the capital gain on the sale of goodwill, is assessable under Section 12B.

3. Market Value of Shares as Consideration for the Transfer of Assets:
The assessee contended that the transfer of assets in exchange for shares in the new company did not bring any profit or gain, arguing that the shares had no market value at the time of transfer. The Tribunal, endorsing the Appellate Assistant Commissioner's reasoning, found that the shares had a market value equivalent to their face value of Rs. 100 per share. This was supported by the fact that 1,870 shares were issued for cash to 16 outsiders at the same rate, indicating that the shares were intrinsically worth Rs. 100 each. Consequently, the shares allotted to the assessee were equivalent to Rs. 5 lakhs in cash, and there was nothing imaginary or inflated about the sale price. The court found no merit in the assessee's contention and upheld the Tribunal's finding.

Additional Considerations:
The assessee also filed a civil miscellaneous petition to reframe or resettle the questions referred to include the contention that the amount of Rs. 3,12,358 received on the allotment of shares did not represent capital gain. The court examined the scope of Section 66(4) of the Act and concluded that it could not be used to reframe or resettle the questions already referred. The court noted that Section 66(4) allows for additional statements or alterations only if the High Court finds itself unable to determine the questions raised by the Tribunal. Therefore, the petition was dismissed as it was out of time and did not meet the conditions required under Section 66(4).

Conclusion:
The court answered both referred questions in the affirmative and dismissed the civil miscellaneous petition without costs. The judgment confirmed that the transfer of assets occurred after April 1, 1946, and that the capital gain on the sale of goodwill is assessable under Section 12B. Additionally, the court upheld the Tribunal's finding that the shares received as consideration had a market value equivalent to their face value.