TMI Blog1967 (5) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... gencies Ltd.) and debentures, and book and other debts in consideration of 79,993 shares of the face value of Rs. 100 each of Killick Industries Ltd., and Rs. 700 in cash. By another agreement dated January 29, 1948, the assessee agreed to sell to " Killick Nixon Co. Ltd. " goodwill of the business of the assessee, freehold and leasehold hereditaments, plant and machinery, stock-in-trade and book debts, Government securities and shares and full benefit of all shipping and general agencies, distributorships, etc., in consideration of 9,996 shares in the vendee-company of the face value of Rs. 100 each and Rs. 400 in cash. The assessee was dissolved and its business was discontinued with effect from February 1, 1948. In a proceeding for assessment to tax payable by the assessee for the year 1949-50 (the relevant previous year being the year ending June 30, 1948), the Income-tax Officer assessed the capital gains made by the assessee, on the transfer of its capital assets to the two companies, at Rs. 32,01,747. In appeal, the Appellate Assistant Commissioner modified the order. He was of the view that the assessee had made capital gains amounting to Rs. 25,40,737 by sale of share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agencies, 240 shares of the Cement Agencies Ltd. and the goodwill on January 1, 1939, considerably exceeded Rs. 51,40,802. The Tribunal observed in paragraph 10 of its judgment : " We do not think it is necessary to deal with in detail the evidence produced before the income-tax authorities in respect of the valuation as on January 1, 1939. The stand taken by the assessee, in our opinion, is inconsistent. A uniform method must be adopted both as on the date of the transfer and as on January 1, 1939. It is not open to the assessee to value an asset by applying one method on February 1, 1948, and another on January 1, 1939." The Tribunal then observed that since the assets were transferred to a company in which the partners of the assessee were interested, and the transfer was made for a consideration which was less than the market value, it was not open to the assessee to contend that the market value of the assets on January 1, 1939, should be taken into account ; that the assessee was not entitled to reduce the capital gain by adopting the valuation of those assets which had a market quotation and in respect of assets which had no market quotation by adopting the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deal in detail with the evidence produced before the income-tax authorities, the Tribunal has clearly misdirected itself and has also not applied its mind properly to the material on record." Section 12B, which was introduced in the Indian Income-tax Act, 1922 with effect from the 31st day of March, 1947, omitting parts not material : read as follows : " (1) The tax shall be payable by an assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale, exchange or transfer of a capital asset effected after the 31st day of March, 1946 ; and such profits and gains shall be deemed to be income of the previous year in which the sale, exchange or transfer, took place :... (2) The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely :-- (i) expenditure incurred solely in connection with such sale, exchange or transfer ; (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. By virtue of the first proviso the Income-tax Officer is, in the conditions set out therein, entitled to determine the fair market value of the asset at the date of the sale, exchange or transfer. Under the third proviso the assessee, when he has exercised the option to adopt the value on January 1, 1939, is, for computation of the actual cost to him of an asset transferred, required to prove the fair market value of the asset on January 1, 1939, when the asset transferred belonged to him before that date. There was no dispute in the present case about the market value at the date of the transfer of the assets conveyed. The first proviso therefore did not come into play. The dispute related to the value to the assessee on January 1, 1939, of three assets, viz., the managing agencies, 240 shares of, the Cement Agencies Ltd. and the goodwill. The capital gain or loss had to be determined by deducting from the market value of the asset on February 1, 1948, the fair market value of those assets on January 1, 1939, proved by the assessee to the satisfaction of the Income-tax Officer. The Appellate Assistant Commissioner estimated the value of the three assets on January 1, 193 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year and the date of such discontinuance........." It is common ground that the assessee was assessed to tax in respect of the income from business under the Indian Income-tax Act, 1918 (7 of 1918), and the case is not one of succession by virtue of which the provisions of sub-section (4) of section 25 are rendered applicable. Prima facie, the assessee was entitled to the benefit of section 25(3), i.e., it was exempted from payment of tax in respect of the income, profits and gains earned by carrying on business for the period between the end of the previous year and the date of discontinuance of the business. This court observed in Commissioner of Income-tax v. Chugandas and Co. that the exemption under section 25(3) is not restricted only to income on which tax was payable under the head " Profits and gains of business, profession or vocation under the Act of 1918. Counsel for the assessee contended that, even though under the Act of 1918 capital gain was not charged to tax under the Income-tax Act, 1922, as amended in 1947, since capital gains earned by the assessee form part of the income of the assessee as defined in section 2(6C) of the Act, and are on that accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which was not chargeable as income under the Act of 1918, for, in our view capital gains, though they are income within the meaning of section 2(6C) as incorporated by Act 7 of 1939, and modified by Act XXII of 1947, are not income earned from trading activity carried on by an assessee, and, therefore, cannot be admitted to exemption under section 25(3). In Commissioner of Income-tax v. Express Newspapers Ltd. this court expounded the true nature of capital gains at page 260 : " Under that section (section 12B) the tax shall be payable by the assessee under the head 'Capital gains' in respect of any profits or gains arising from the sale of a capital asset effected during the prescribed period. It says further that such profits or gains shall be deemed to be income of the previous year in which the sale, etc., took place. This deeming clause does not lift the capital gains from the sixth head in section 6 and place it under the fourth head. It only introduces a limited fiction, namely, that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. This fiction does not make them the profits or gains of the business." Capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X
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