TMI Blog1958 (3) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... The parties agreed that the cost of those assets should be taken at ₹ 4,85,354 for the purpose of the appeal. While making the assessment on the appellant-firm, the Income-tax Officer treated that the sale of the assets took place at ₹ 4,85,354 to the private limited company. The difference between the original cost and the written down value amounting to ₹ 1,03,506 ₹ 4,85,354 minus ₹ 3,81,848) was added by the Income-tax Officer to the appellant's income for the assessment year 1950-51 under the second proviso to section 10(2)(vii) of the Income- tax Act. 3. It was argued by the assessee that the transfer of the assets from the firm to the limited company is not a sale and, therefore, no surplus has accrued to the assessee. The assessee had been given depreciation allowance in the past on the condition that if the plant or machinery was sold above the written down value, the assessee will have to bring to tax the depreciation allowance already availed of by the assessee as provided in the second proviso to section 10(2)(vii) of the Act. What is the price at which a particular transaction takes place is ordinarily a question of fact. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place. The only narrow question that we have to consider on this reference is whether on the facts and circumstances of this case it could be said that the building, machinery or plant was sold by the firm of Messrs. Rogers Co. to the private limited company of Messrs. Rogers Co. Ltd. If there was a sale, then the second proviso is attracted and the assessee company is liable to pay tax on the difference between the written-down value and the cost price. Now what are the facts and circumstances of this case? We have a legal entity-the partnership firm consisting of eleven partners. We have a different legal entity constituted by the private limited company. Undoubtedly the two entities are different in the eye of the law, but-and it is an important 'but'-the persons who constitute the two entities are ident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of income-tax, because a person cannot make profit out of himself. The basic idea underlying section 10(2)(vii) is that the vendor has made profit by the transfer of his assets. Mr. Joshi is right that profit is notional, but still it is a profit; and in order that the profit should be made, there must be two parties to the transaction--the vendor and the vendee-and the vendor must make profit by transferring his asset to a third party. If he transfers it to himself, he cannot make profit either real or notional. These principles which we are enunciating were very clearly and emphatically enunciated in Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 I.T.R. 928. Mr. Joshi does not like these principles; but for good or for evil they are there till a higher Court tells us that they are not the correct principles which we laid down. Now that was a case where Sir Homi Mehta and his sons constituting a firm transferred certain shares to a private limited company. The shares were transferred at the value of ₹ 40 lakhs and the shares had originally cost ₹ 30 lakhs, and the Department contended that the assessee must pay tax on the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kes it clear that the sale contemplated by the Legislature is not only a sale where according to the real transaction, from the commercial point of view, it is a sale, but even where it is a sale from a legal and technical point of view. Why are we to construe the expression sale in the second proviso in the wide manner suggested by Mr. Joshi? Why are we to say that the assessees have made notional profits out of a transaction when in reality that transaction is nothing more than a readjustment of the position of the assessees qua their business? There is no indication given by the Legislature that the expression sale in this second proviso should be construed, not from the point of view of the ordinary canon of construction laid down with regard to taxing laws, but according to some special canon of construction. In our opinion, if Homi Mehta's case [1955] 28 I.T.R. 928 correctly laid down the law, then we must come to the conclusion that the transaction effected between the firm of Rogers Co. and the private limited company was not a sale, and if it was not a sale the provisions of the second proviso are not attracted. It must follow from our decision that, if there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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