TMI Blog1964 (4) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern by the assessee firm to R.B. Lachmandas Mohan Lal and Sons Ltd., a private limited liability company incorporated on January 20, 1948. The memorandum and articles of association of the said company are annexed hereto as annexures A and B , which form part of the case. They are, however, not printed in order to save cost and the assessee has undertaken to furnish copies to their Lordships at the time of the hearing. The Controller of Capital Issues issued a certificate to the said company, dated January 12, 1948, a copy whereof is annexed hereto as annexure C and forming part of the case. 3. The transfer to the said company by the assessee is evidenced by an agreement of sale dated January 20, 1948, and a sale deed dated January 21, 1948, which are annexed hereto as annexures D and E and forming part of the case. 4. According to the sale deed, the consideration for the land, buildings, machinery, plant and other assets was fixed at ₹ 30,00,000. Out of this, the cost of assets on which depreciation had been allowed to the assessee-firm was found to be ₹ 10,40,742. The written-down value of these assets was ₹ 5,34,185. Therefore, according to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1949, shall have come into force. CHAPTER II 3. Amendment of section 10, Act XI of 1922.--In section 10 of the Income-tax Act,-- (1) in sub-section (2),--... (ii) in the second proviso to clause (vii), for the words 'is sold' the words 'is sold, whether during the continuance of the business or after the cessation thereof, 'shall be substituted; (3) The Taxation Laws (Extension to Merged States and Amendment) Act, 1949. (Received the assent of the Governor-General on the 31st December, 1949). ACT NO. LXVII OF 1949 CHAPTER II 3. Extension of Taxation Laws to Merged States.--(1) The following Acts, namely:--... (2) The Indian ?ncome-tax Act, 1922, the Business Profits Tax Act, 1947, and the Indian Finance Act, 1949, and all Rules and Orders made thereunder, shall operate as if they had been extended to, and brought into force in, all the merged States on the 1st day of April, 1949. (4) Section 10(2)(vii): (vii) in respect of any such building, machinery, or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessed for the broken period October 1, 1947, to January 20, 1948, i.e., for the assessment year 1948-49 in terms of section 25(1) of the Act; (c) that the second proviso as amended by the words whether during the continuance of the business or after the cessation thereof , did not apply to an assessment either for the assessment year 1948-49 or the assessment year 1949-50; (d) that the surplus realised was not chargeable as capital gains under section 12B of the Act as the sale was effected by the individual partners and therefore, fell within the exemption mentioned in the third proviso to sub-section (1) of section 12B; (e) that the excess receipts on the sale of stocks of sugar to the company on January, 1948, was not chargeable to tax. 9. The Income-tax Officer negatived the assessee's contentions. The Appellate Assistant Commissioner although agreeing with the assessee's contention that the second proviso to section 10(2)(vii) as amended would not apply to the assessment year 1949-50, confirmed the Income-tax Officer's finding as to the assessee's liability under the second proviso to section 10(2)(vii) on the ground that the assessee had sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see no reason to refer them. The Income-tax Officer's and the Appellate Assistant Commissioner's orders are annexed hereto at the request of the assessee as G and H . SUPPLEMENTARY STATEMENT OF CASE In accordance with the order of the High Court of Judicature at Allahabad dated 3rd August, 1959, in Misc. Application No. 2316 of 1959 in I.T. Reference No. 315 of 1958, we hereby draw up a supplementary statement of the case. 2. The assessee was a firm consisting of six partners, viz.: (1) Lachmandas, (2) Mohanlal, (3) Mulkraj, (4) Banrasi Das, (5) Dwarka Das, and (6) Kanhaiya Lal. The accounting year relevant to the assessment year 1949-50 is the year ending September 30, 1948. The business of the assessee-firm was that of manufacture and sale of sugar, molasses, confectionery, golden syrup and extraction and sale of rice and oil. It also owned sugar mills in the form of land, buildings, plant and machinery for the purpose of the said business. 3. The said business was transferred as a going concern to a private limited company called R.B. Lachmandas Mohan Lal and Sons Ltd. (hereinafter called the company) by a deed of sale dated January 21, 1948. The iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oratory expenses ... 3,6,51 0 0 Furniture and fittings ... 1,440 1 6 5,89,550 3 6 The above sum of ₹ 5,89,550-3-6 was debited to the six partners' accounts in their profit sharing proporti?ns. The consideration amount for the transfer of the assets to the company was ₹ 30,00,000. This amount was divided and credited to the six partners' accounts in their profit sharing proportion as on January 20, 1948. 4. The stocks of sugar, molasses, stores and sundry other materials were transferred to the company for ₹ 24,55,139-8-0. The value of sugar included in this was ₹ 21,50,148-8-6. The details are as under: Rs. As. Ps. Rs. As. Ps. Sugar 16926 maunds @ 35 12 6 6,06,642 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer to the company were 7,692 bags for ₹ 7,55,032-5-3. The transfer to the company were 16,578 bags together with 2,420 maunds of sugar in process and they were valued at ₹ 16,09,108-6-2. The total transfer to the company were ₹ 21,50,148. 7. The assessee-firm ascertained the profit rate of old sugar at 1.106 per cent. on sales and at 11.915 per cent. on sales of new sugar . Applying these rates to the transfer to the company, the assessee firm worked out the profit on the transfer sale of ₹ 21,50,148 to the company at ₹ 5,990 plus ₹ 1,91,737 minus ₹ 1,97,727. Similarly in regard to molasses, mustard, ground-nut and khandsari sugar which had also been transferred to the company the assessee firm had ascertained the profit. They amounted to ₹ 3,814. The total profit on the transfer of sugar, molasses, mustard oil, and ground-nut oil to the company amounted to ₹ 2,01,541. The figure of ₹ 2,05,041 given in the statement of the case appears to be wrong. The profit on the sales prior to the transfer of the assessee's business amounted to ₹ 75,743. The assessee-firm returned this together with an adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery and also in the extraction and sale of oils. It owned a sugar mill. On January 21, 1948, the business was transferred as a running concern by the assessee to a private limited company, R.B. Lachmandas Mohanlal and Sons, Ltd., which was incorporated the previous day. On the date on which the company was incorporated, the assessee entered into an agreement to sell the business to the company, and on January 21, 1948, a sale deed was executed. Under the terms of the sale deed, the consideration for the land, buildings, machinery, plant and other assets was determined at ₹ 30,00,000. The original cost of the assets, on which depreciation was allowed to the assessee under the Income-tax Act, was ₹ 10,40,742 and the written down value of these assets was ₹ 5,34,185. During the assessment proceedings for the assessment year 1949-50 (the relevant previous year being the year ending September 30, 1948), the Income-tax Officer applied the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, and held that a sum of ₹ 5,06,557 was liable to be included in the assessee's total income. The Income-tax Officer also came to the opinion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplementary statement was submitted to this court, was an application made under section 66(4) and was, therefore, not maintainable. Since the application was not maintainable, it is argued, no valid reference could be called for by this court nor made by the Tribunal. The Supreme Court in Kamlapat Motilal v. Commissioner of Income-tax [1962] 45 I.T.R. 266 (S.C.) has held that where the Tribunal does not refer all the questions of law raised by the assessee but only some of them, an assessee desiring that other questions of law should also be referred to the High Court must apply to the court under section 66(2) and not under section 66(4). It is not disputed that the application made by the assessee was an application under section 66(4). Learned counsel for the assessee, however, prays that the application under section 66(4) may be treated as one under section 66(2), and urges that if that be done then the reference subsequently made by the Tribunal is a competent reference. It is difficult to accede to this suggestion. The application disposed of by this court on August 3, 1959, was dealt with as an application under section 66(4). Even if it were possible now to suppose tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iminary objection must be upheld. In the result, we decline to answer the question referred in the supplementary statement of the case. Turning to the questions referred by the original statement of the case, it seems to us that the answer to the first question is plainly that the sale on January 21, 1948, was effected by the assessee and not by its partners in their individual capacity. Learned counsel for the assessee has not seriously pressed the contention that the sale was by the individual partners. Indeed, it appears to us that the contention is not capable of serious consideration having regard to the several circumstances detailed in the appellate order of the Tribunal. The Tribunal has pointed out that there is no deed of dissolution of the firm nor any other evidence of its dissolution. The agreement of sale also discloses that the assessee was party to the agreement and not its partners as individuals. The agreement plainly shows that the business was transferred as a going concern. If the firm had suffered dissolutions and the assets had been divided, there would have been no occasion for transferring a running business. These and the other circumstances, including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Similarly, in Commissioner of Income-tax v. Mugneeram Bangur Co., [1963] 47 I.T.R. 565 the Calcutta High Court, considering a case where a firm consisting of five partners floated a limited company and transferred its entire business and assets to the company, and where, except for 7 shares, the entire share holding of 34,993 shares were allotted to the partners of the firm and the consideration for the transfer was the allotment of these shares, held on the basis of the principle that there cannot be a sale by a person to himself that there was no profit in the transaction. Again, in Commissioner of Income-tax v. Morning Star Bus Service [1963] 49 I.T.R. 927 the Kerala High Court held that the second proviso to section 10(2)(vii) would not apply where n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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