TMI Blog1965 (9) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... ... 8-1/3% 5. Vardhman Moolji ... 18-3/4% 6. Virchand Chunilal ... 18-3/4% 7. Ratilal Maganlal ... 12-1/2% Clause 2 of the deed of partnership provided that the main business of the firm was to be the purchase of open plots of land for construction of buildings, construction and sale of new buildings and any other business in addition thereto with the consent of all the partners. After the firm was so constituted, it purchased in Samvat year 2013 two plots of land admeasuring in all 1,250 square yards in Surendranagar. The land was purchased not in the name of the firm, but in the names of two of its partners, Keshavlal Trikamlal and Chandulal Lavjibhai. That was done because clause 10 of the partnership deed provided that contracts pertaining to the business of the firm should be entered into by the said Keshavlal Trikamlal and Chandulal Lavjibhai on behalf of the firm and that clause forbade the other partners from entering into contracts on behalf of the firm. The land was purchased at a total cost of ₹ 70,167 and according to the building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that the shares described in this deed did not exactly correspond with the shares of the parties in the firm as set out in the deed of partnership. In the account for Samvat year 2015, which was made up by the parties thereafter, certain further expenses in the sum of ₹ 2,717 in respect of the aforesaid shops were debited and a sum of ₹ 77 was credited as the sale proceeds of certain materials sold. According to the deed of distribution, the aggregate value of the shops agreed to by the partners was shown at ₹ 89,000. This left a surplus of ₹ 4,831 in the said construction account which amount was carried to the profit and loss account for Samvat year 2015. That being the position of the accounts, in the returns filed by the firm for the assessment year 1960-61, the said amount of ₹ 4,831 was shown as the taxable income of the firm for that year. During the assessment for the assessment year 1960-61, the assessee- firm contended before the Income-tax Officer that no further profit should be taken to have been made by the assessee-firm in respect of the twentyeight shops distributed amongst themselves by the partners over and above the said amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction was one of a division and distribution of the assets and that the principle laid down in Sir Kikabhai's case applied*, and confirmed the decision of the Appellate Assistant Commissioner. The Commissioner, as we have said, has challenged this finding and on his behalf the learned Advocate-General contended that the principle laid down in Sir Kikabhai's case [1953] 24 I.T.R. 506; [1954] S.C.R. 235 as also in the case of Sir Homi Mehta's Executors** was not applicable to the facts and circumstances of the present case. His contention was that the facts of the present case did not warrant the application of the principle laid down in those two decisions. In the present case, the facts, which admit of no dispute and on which the Tribunal proceeded to consider the case, are (1) that there was discontinuance of the business of the firm on and from October 22, 1958, when the partners agreed to distribute amongst themselves the remaining twenty-eight shops and the aforesaid agreement of distribution was recorded subsequently in a formal document executed on March 14,1959; (2) that the twenty-eight shops which were trading assets of the firm were valued at an ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... precisely was the nature of the transaction and what did the parties do when they entered into that transaction. The mere fact that the partners called the document a deed of distribution is not sufficient, for it is well-settled that what we have to see is its substance and not the form. A perusal of the deed of distribution shows that the transaction, no doubt, was one of distribution of the remaining twenty-eight shops out of the forty shops constructed by the assesseefirm. The deed also shows that for the purpose of distribution of these twenty-eight shops the partners formed themselves into three groups called the parties of the first, second and third parts, the party of the first part being Keshavlal Trikamlal, the party of the second part consisting of Himatlal Lavjibhai, Kantilal Lavjibhai and Chandulal Lavjibhai and the party of the third part being Vardhman Moolji, Virchand Chunilal and Ratilal Maganlal. Clause 3 of the deed recites that the shops were till then managed by the assessee-firm, that the land was purchased from, and the construction of forty shops thereon was made from, the capital of the firm, that the sale proceeds of the twelve out of forty shops were cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party of the second part, totalling to ₹ 89,000, to which were added ₹ 77 being the sale proceeds of certain materials. After adjusting the balance of ₹ 81,529, and certain other amount, the surplus of ₹ 4,831 remained which had to be accounted for and that amount, therefore, was, as aforesaid, carried to the profit and loss account of that year and was shown as the income of the firm in the firm's income-tax returns for the assessment year 1960-61. Prior to this transaction, the position in law was that these twentyeight shops were the stock-in-trade or the trading assets of the assessee-firm. None of the partners had, or could claim to have, a specific right in any of these shops, for the only right which they had or which they could claim was their share in the partnership property and assets. On the distribution of these assets, what the partners did was that they inter se conveyed their right, title and interest in these assets to the party to whose share a particular shop or shops went and, therefore, clause 9 of the deed recited that in respect of the shops which came to the different parties, such parties became the absolute owners of such sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trading asset to a non-trading activity by the assessee, if treated as a business transaction, would amount to a notional sale by the assessee to himself and a notional or a fictional profit arising from such a fictional sale. In the words of Bose J., who spoke for the majority, in the present case, disregarding technicalities, it is impossible to get away from the fact that the business is owned and run by the assessee himself. In such circumstances we are of opinion that it is wholly unreal and 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. Cut away the fiction and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law. And worse. He may keep it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be compelled to sell at a profit. But in this purely fictional sale to himself, he is compelled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. As these shares had cost Sir Homi Mehta only ₹ 30,45,017 the revenue assessed income-tax on the difference between the market price and the cost price on the footing that the assessees had made a profit to that extent by the transaction in question. The case of the revenue, however, was negatived by Chagla C.J. and Tendolkar J. on the ground that the result of the formation of the private limited company and the sale of the shares to that company was that those very shares, instead of being held by the assessee and his sons jointly in their individual capacity, would henceforth be held by those very same individuals constituted into a limited company. The only result of the transaction therefore was that the assessee and his sons held these very shares in a different way from the way they held before the transaction was completed, adopting the mode of forming a limited company with all its advantages in order to hold those shares, to deal with them and to make profit out of those shares. Besides this consideration, the learned judges posed to themselves the question whether it could be said that in forming the limited company and transferring those shares to it the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of construction and sale of the shops, the partners as business men dealing with the business or trading assets belonging to the firm, agreed to distribute them amongst themselves just as partners in any other such firm would do when they decide to discontinue their firm's business. Therefore, it cannot be gainsaid that what the partners did in this case was to enter into a business transaction. The transaction, unlike the one in Sir Kikabhai's case [1953] 24 I.T.R. 506 (S.C.), was not merely withdrawal of a business asset resulting in a loss to that business and transferring it to a non-trading activity, the beneficiary of which was the assessee himself. Unlike the case in Sir Homi Mehta's Executors [1955] 28 I.T.R. 928, the transfer also was not substantially to the same individual. Though there was not actually a dissolution of the partnership in the present case and there is no such finding, the partners were in effect doing precisely what they would do under section 48 of the Partnership Act, dividing the assets of the firm amongst themselves which they until then held jointly and conveying mutually their right, title and interest in each of the shops which went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o discontinue the business and make up accounts and distribute its assets and liabilities amongst themselves. But then Mr. Kaji argued that the document itself shows that the transaction was not a business transaction but one of distribution, the partners seeking thereby to distribute the assets amongst themselves as partners. The transaction being one of distribution only and the partners not having gone through it with the intention of making any profit, it could not be regarded as a business transaction. Mr. Kaji sought to rely on Commissioner of Income-tax v. West Coast Chemicals and Industries Ltd. [1962] 46 I.T.R. 135 (S.C.) as an authority for the proposition that where a sale is a realisation sale, the transaction is not a business or a commercial transaction. What happened in that case was that the assessee-company entered into an agreement for the sale of lands, buildings, plant and machinery of a match factory belonging to it for a sum of ₹ 5,75,000 with a view to close down that business. The purchaser made default in payment and, thereupon, a fresh agreement was entered into between the parties for the sale of the properties mentioned in the first agreement an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action which a business man, in a commercial or business sense, would enter into. The two decisions thus were concerned with a different question arising under section 10 and cannot assist Mr. Kaji. Mr. Kaji next sought to show that the surplus of ₹ 4,831 shown by the parties in the accounts of the firm was an error on their part and that in fact the transaction relating to the shops as a whole ended in a loss. He argued that it was an error on the part of the parties to take the figure of ₹ 1,64,000 and odd as cost of the forty shops and deduct therefrom ₹ 79,499 which were the sale proceeds of twelve shops sold in Samvat year 2014 and arrive at the figure of ₹ 89,000 and odd as the debit balance. According to him, the correct fact was that the sum of ₹ 79,499 contained profits of ₹ 10,000 in respect of the sale of the said twelve shops and that, therefore, what the partners ought to have done was to deduct only ₹ 69,000 and odd from ₹ 1,64,000. He pointed out that if that were done, the transaction would have shown a loss and not a surplus of ₹ 4,831. But then, such a case was never made out before any of the authorities an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notional and unreal surplus. That, in our view, is not permissible and would be contrary to the realities of the transaction. We may observe that it has not been the case of the revenue authorities that the transaction was not a bona fide transaction or that the transaction was a sham one or that the price paid was other than the one set out in the deed of distribution. If any authority on this proposition is needed, it is to be found in Sri Ramalinga Choodambikai Mills Ltd. v. Commissioner of Income-tax [1955] 28 I.T.R. 952. In that case, the account books of the assessee, a limited company, showed that some of its goods were sold to its managing agency firm, to one of its directors, and to a firm in which one of the directors was a partner, at prices much lower than the market price. The income-tax authorities, finding that the sales to these persons at lower prices were not bona fide sales and were effected to benefit the purchasers at the expense of the company, included the difference between the price for which those goods were sold and their market price at the date on which the goods were sold, as profits of the company in its assessment. The High Court of Madras held that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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