TMI Blog1972 (9) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, the Income-tax Tribunal, " B " Bench, Calcutta, stated a case and submitted as many as five questions to the High Court for obtaining its opinion. Some of the questions referred to the High Court have not been pressed before this court. Therefore, we shall not refer to them. The questions that were pressed before us are : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 34(1)(a) have been validly initiated ? (2) Whether, on the facts and in the circumstances of the case, any capital gains within the meaning of section 12B could be said to arise by the transaction involving transfer of the investments held by the assessee to the company, admission of the company as a partner in the assessee-firm and issue of shares of the company to the public ? and (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in computing the capital gains at Rs. 46,76,784? " The High Court answered the first question in the affirmative and in favour of the revenue. So far as the second question is concerned, it split the same into two questions, viz., whether, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pectively in the profits of the firm. We are concerned with the assessment of the assessee firm for the assessment year 1947-48 for which the previous year was the financial year ended on March 31, 1947. On February 28, 1947, the assessee-firm, through its partners, entered into an " agreement for sale " of some of the shares and securities held by it in favour of Gillanders Arbuthnot Co. (to be hereinafter referred to as " the company ") for a sum of Rs. 75 lakhs. The shares and securities sold under the document are enumerated at the foot of the document. Clause (2) of that agreement provides : " In consideration of the sum of Rupees fourteen lakhs and ninety thousand the existing partners shall admit the company as a partner in the firm upon and subject to the partnership deed (a draft whereof has been already approved by the existing partners and the company), the share of the company in the goodwill and in the profits of the firm being ninety-nine per cent. thereof. The only other clause which is relevant for our present purpose is clause (3), which reads : " The said two sums of Rupees seventy-five lakhs and Rupees fourteen lakhs and ninety thousand payable in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer initiated proceedings under section 34(1)(a) on May 2, 1949, and completed the fresh assessment on January 16, 1956, bringing to charge capital gains determined at Rs. 1,03,16,786. The assessee appealed to the Appellate Assistant Commissioner. It raised various contentions before the Appellate Assistant Commissioner. It is not necessary to refer to those contentions. Suffice it to say for our present purpose that it challenged the validity of the initiation of the proceedings under section 34(1)(a) and further it contended that there was no capital gain at all. On the other hand, it claimed that it incurred certain capital loss. The Appellate Assistant Commissioner rejected the contention of the assessee that the proceedings under section 34(1)(a) were not validly initiated. He came to the conclusion that there were capital gains but he computed the same at Rs. 70,09,124. On further appeal by the assessee the Tribunal came to the conclusion that the capital gains made by the assessee were only Rs. 46,76,784. In the reference, as mentioned earlier, the High Court came to the conclusion that the capital gains made by the assessee were Rs. 27,04,772. The firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disclose fully and truly all material facts necessary for his assessment for that year " used in section 34 postulate a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts are material and necessary for assessment differ from case to case. In every assessment proceeding, the assessing authority would for the purpose of computing and determining proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee or discovered by him on the basis of the facts disclosed or otherwise, the assessing authority has to draw inferences as regards certain other facts ; and ultimately from the primary facts and further facts inferred from them, the authority has to draw the proper legal inferences and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable. So far as the primary facts are concerned, it is the assessee's duty to disclose all of them including particular entries in the account-books, particular portions of documents and documents and other evidence which could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany nor was there any material before the Income-tax Officer as to the value of those shares and securities on January 1, 1939. Further, no material was placed before him to show that those shares and securities had been sold to the " company " for a sum of rupees 75 lakhs. In fact the assessee submitted its return for the assessment year in question in an old form which did not contain Part VII which dealt with particulars of income from capital gains. The statement enclosed also did not contain specific particulars about consideration for the sale of goodwill or for the sale of shares of the " company ". It is not without significance that the assessee did not challenge the validity of the proceedings under section 34(1)(a) before the income-tax Officer. Even before the Appellate Assistant Commissioner, the only point that appears to have been urged was that since the firm was reconstituted and the reconstituted firm was granted registration under section 26A in the assessment year 1947-48, it should be presumed that the Income-tax Officer while making the original assessment was aware of all the material facts. We agree with the Tribunal and the High Court that there is hardl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t for our present purpose]. The Income-tax Officer opined that the market value of the shares and securities sold was much more than Rs. 75 lakhs. Admittedly, their original cost on January 1, 1939, was Rs. 47,95,728. Hence, according to him, the " company " secured those shares and securities at below market value. The Income-tax Officer further observed that the partners of the assessee-firm were the sole partners of the " company " and further held that the sale had been effected at a lower price with the object of reducing the liability to capital gains tax. On the basis of the Income-tax Officer's computation, the capital gains on the sale of the investments were Rs. 75,86,960. As regards the goodwill, the Income-tax Officer valued the same as on January 1, 1939, at Rs. 87,56,200 and 99 per cent. thereof would work out to be Rs. 86,67,648. The assessee received for goodwill the sum of Rs. 14,90,000. The company took over 99 per cent. of the capital deficiency of the partners amounting to Rs. 19,98,849 and 99 per cent. thereof came to Rs. 19,78,861. The Income-tax Officer estimated the value of 99 per cent. of the goodwill at Rs. 1,13,97,474 involving capital gain of Rs. 27, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was in effect an exchange though in form it was a sale. According to the assessee, it was a mere readjustment. The revenue did not contend before the Appellate Assistant Commissioner or the Tribunal or even the High Court that the said transaction was not a sale. It was for the first time before this court the contention was taken that it was not a sale. The contention of the assessee that it was merely a readjustment had been rejected by the authorities under the Act as well as by the High Court. Properly understood, the effect of the contention of the revenue as well as of the assessee is that in finding out the true nature of a transaction, the court must take into consideration the substance of the transaction and not the legal effect of the agreement entered into---a proposition which receives some support from some of the decided cases. In Sir Kikabhai Premchand v. Commissioner of Income-tax this court observed that " it is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. " The observations of this court in Sir Kikabhai Premchand's case were made the basis of the decision of the Bombay High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction and the same evidences a sale. This is essentially a finding of fact. The High Court has affirmed that finding. In that view, we are unable to accept the contention of the revenue that the transaction in question was an exchange and not a sale. We are equally unable to accept the contention of the assessee that it was merely a readjustment. Clause (1) of the agreement in specific terms says that " the existing partner shall sell and the company shall purchase the shares and securities for a sum of rupees seventy-five lakhs ". Clause (3) of that agreement merely provides a mode of satisfaction of the sale price. The sale price fixed by the parties for the shares and the securities sold is Rs. 75 lakhs and nothing more. It may be that because of the allotment of the shares of the company in satisfaction of the sale price, the assessee-firm got certain benefits but that does not convert the sale into an exchange. In Commissioner of Income-tax v. R. R. Ramakrishna Pillai this court, distinguishing an exchange from a sale observed that where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the consideration is the full sale price actually paid. The legislature had to use the words ' full value of the consideration ' because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share, the full value of the consideration must be taken at the rate of Rs. 136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section, 12B(2), the expression ' full value of the consideration ' is used in contradistinction with ' fair market value of the capital asset ' and there is an express power granted to the Income-tax Officer to ' take the fair market value of the capital asset transferred ' as ' the full value of the consideration ' in specified circumstances. It is evident that the legislature itself has made a distinction between the two expressions ' full value of the consideration ' and ' fair market value of the capital asset transferred ' and it is provided that i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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