1973 (6) TMI 2 - HC - Income Tax

The Income-tax Officer held that the assessee sold away the assets which were previously used for his business in respect of which depreciation was allowed and in the transaction of sale to the company he realised a profit of Rs. 61, 330. - Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that the sum of Rs. 61, 330 is assessable under section 10(2)(vii) of the Indian Income-tax Act 1922 ?

Issues Involved:
1. Whether the transaction in question amounts to a sale under section 10(2)(vii) of the Indian Income-tax Act, 1922.
2. Whether the profit of Rs. 61,330 derived from the transaction is taxable under section 10(2)(vii).
3. Whether the substance of the transaction should be considered over its form.
4. Whether the determination of profits at Rs. 61,330 was correct.

Issue-wise Detailed Analysis:

1. Whether the transaction in question amounts to a sale under section 10(2)(vii) of the Indian Income-tax Act, 1922:
The court examined the deed of assignment dated December 1, 1954, which transferred the assessee's business assets to a private limited company for Rs. 5 lakhs. The consideration was satisfied by the allotment of shares. The assessee contended that this transaction was merely a conversion of a proprietary concern into a limited company or an exchange, not a sale. However, the court held that the transaction amounted to a sale. The court referred to the Supreme Court decision in Commissioner of Income-tax v. R. R. Ramakrishna Pillai, which established that when assets are transferred for a money consideration and shares are allotted in satisfaction of that consideration, it constitutes a sale. The court concluded that the transaction was indeed a sale, thereby attracting the provisions of section 10(2)(vii).

2. Whether the profit of Rs. 61,330 derived from the transaction is taxable under section 10(2)(vii):
The court noted that the Income-tax Officer had included the profit of Rs. 61,330 in the assessee's total income for the assessment year 1956-57. The Appellate Assistant Commissioner and the Tribunal upheld this inclusion. The court emphasized that the second proviso to section 10(2)(vii) applies when the sale amount exceeds the written down value of the assets, and the excess is deemed to be profits of the previous year in which the sale took place. The court affirmed that since the transaction was a sale and the sale amount exceeded the written down value, the profit of Rs. 61,330 was correctly included in the assessee's total income.

3. Whether the substance of the transaction should be considered over its form:
The assessee argued that the substance of the transaction should be considered, asserting that it was an exchange rather than a sale. The court rejected this contention, citing the Supreme Court decision in Commissioner of Income-tax v. B. M. Kharwar, which held that the taxing authorities must determine the true legal relation resulting from a transaction and not ignore the legal character of the transaction. The court concluded that the legal effect of the transaction was a sale, and the substance-over-form argument could not displace the legal effect.

4. Whether the determination of profits at Rs. 61,330 was correct:
The assessee attempted to argue that even if the transaction was a sale, the profit of Rs. 61,330 was not correctly determined, as depreciation had been allowed only for some of the assets, and the assets were not separately valued. The court rejected this contention, noting that it did not arise from the Tribunal's order or the question referred to the court. The court observed that the determination of profits at Rs. 61,330 was not contested before the Appellate Assistant Commissioner or the Tribunal, and thus, it could not be allowed to be urged at this stage.

Conclusion:
The court answered the question referred for its opinion in the affirmative, holding that the Tribunal was justified in law in holding that the sum of Rs. 61,330 is assessable under section 10(2)(vii) of the Indian Income-tax Act, 1922. The revenue was entitled to the costs of the reference, and a copy of the judgment was to be forwarded to the Appellate Tribunal as required by law.

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