TMI Blog1962 (8) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... all their advantages, goodwill, licences and privileges as standing on...and pay for such rights and privileges in cash, or in shares or partly in cash and partly in shares of the company (as may be agreed upon between the parties), and to carry on the said business along with other business mentioned in the other succeeding sub- clause of this clause of the memorandum of association. In pursuance of the above object the company took over with effect from the 30th September, 1948, the business of publication of the two newspapers, Indian Nation and Aryavarta as a going concern along with its assets and liabilities. The consideration for the transfer was ₹ 12,50,000 to be satisfied by the allotment to the Maharajadhiraj of fully paid up shares of the requisite amount. Though a formal deed of sale was not immediately drawn up, the agreement was followed by tile actual delivery of possession to the company of the moveable and immoveable assets. To place the transaction on a proper basis, a sale deed was executed on the 1st June, 1950, and registered on the 12th August, 1950, on stamp paper of ₹ 8,435-10-0 confirming the transaction which had already been effected on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Appellate Assistant Commissioner rejected the contention, holding that, since the company was a separate legal entity, it could not be identified with the assessee in his individual capacity. The assessee made a further appeal to the Income-tax Appellate Tribunal, but the appeal was dismissed. Under section 66(2) of the Indian Income-tax. Act the Income-tax Appellate Tribunal has stated a case on the following question of law: Whether under the facts and circumstances of the case the amount of ₹ 1,30,785 (Rupees one lakh thirty thousand seven hundred and eighty-five) only being the excess of sale proceeds, of the buildings, plant and machinery over the written down value thereof could in law be termed to be income, profits and gains of the petitioner? The argument presented on behalf of the assessee is that the transaction of the 30th September, 1948, was not sale by the appellant to the newly floated private limited company. It was submitted that in substance the assessee owned practically all the shares of the company and it was open to the High Court to lift the veil of corporate entity and look behind the same in order to see who were the real parties to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tlemen of the first eight parts, and 'John Foster Sons, Limited (hereinafter called 'the company') of the 9th part'. Pausing there for a moment: although the persons of the first eight parts may be, and were members, and the only members, of John Foster Company, Limited, John Foster Company Limited, is not those eight individuals; John Foster Company, Limited, is a corporation. We have accordingly two parties, one party consisting of several individuals, and the other party consisting of a corporation. Whether they are or are not the members, or the only members of the corporation, is wholly immaterial. The corporation is a totally different person from them in any capacity you choose to assign to them except a corporate one. At page 529 of the report Kay L.J. observed as follows: Now, that there was a conveyance is beyond all question. The persons, who are named as vendors in the deed have divested themselves of their property in the subject of that conveyance, and all that property is vested in an entirely independent and separate body--namely, a corporation. Suppose that corporation had consisted of altogether different persons, no one for a mom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public policy or detrimental to the interests of creditors. If the shares are fully paid up, it cannot matter whether they are in the hands of one or many. If the shares are not fully paid, it is as easy to gauge the solvency of an individual as to estimate the financial ability of a crowd. Lord Halsbury stated as follows: Either the limited company was a legal entity or it was not. If it was, the business belonged to it and to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all. It is impossible to say at the same time that there is a company and there is not. The principle of Salomon's case [1897] A.C. 22 has been reaffirmed by the House of Lords in Commissioners of Inland Revenue v. John Sansom [1921] 8 Tax Cas. 20. In that case all the shares of a limited company save one were owned by one man, Mr. Sansom, who had turned his timber business into a company. The company never distributed any dividends, but it made loans to Mr. Sansom at different times, without security and without interest. The company went into voluntary liquidation. The loans were not repaid, but were taken into account when Mr. Sansom received his share of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that case all the shares of a limited company save one were owned by one man, Mr. Sansom, who had turned his timber business into a company. The company never distributed any dividends, but it made loans to Mr. Sansom at different times, without security and without interest. The company went into voluntary liquidation. The loans were not repaid, but were taken into account when Mr. Sansom received his share of the assets in the liquidation. It was sought to charge Mr. Sansom with super-tax on the loans. The Special Commissioners of Income Tax, however, discharged the assessment on the ground that the company was a properly constituted legal entity, that it had power to make loan to such persons, and on such terms, as it should think fit, and that it did make such loans to Mr. Sansom. On appeal to the King's Bench Division, Rowlatt J. ordered the case to be remitted to the Special Commissioners on the ground that they had not found as a fact that the business had been carried on by the company or that it had really been carried on by the assessee to the exclusion of the company. The assessee appealed against Rowlatt J.'s order remitting the case to the Special Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmally valid when entered into by the seller of goodwill (as opposed to an employee), and that for this purpose a covenant by a shareholder and managing director on a sale by the company is treated as a covenant by a seller and not subjected to the stricter rules applying to an employee. In Connors Bros. Ltd. v. Connors [1940] 4 All E.R. 179 (P.C.); [1940] W.N. 331 the judicial Committee extended this rule to the case of a covenant entered into by the managing director on the sale by him and others of a controlling interest in the share capital of the company. Again the courts will look behind the facade of the company and its place of registration in order to determine its residence. For this purpose the test laid down has long been the place of its central management and control . Normally this place will be that where the board of directors function, but it might, no doubt, be the place of business of the managing director (especially if he held a controlling interest) or that of a parent company. The question of residence is important mainly in connection with taxation (Union Corporation Ltd. v. Inland Revenue Commissioners [1952] 1 All E.R. 646) but it may also govern enemy s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court case the crucial facts were that there was no sale by the assessee to the trustees and moreover the income-tax department accepted as correct the entry in the books of account of the assessee and also accepted the system of accounts adopted by the assessee. It is manifest that the material facts of the present case are different and the principle laid down by the Supreme Court is of no avail to the assessee in the present case. On behalf of the assessee reference was also made to the decision of the Privy Council in Doughty v. Commissioner of Taxes [1927] A.C. 327. In that case two partners carrying on business in New Zealand as general merchants and drapers sold the partnership business to a limited company in which they became the only shareholders. The sale was of the entire assets, including goodwill, the consideration being full paid shares, and an agreement by the company to discharge all the liabilities. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its last balance-sheet, a new balance-sheet was prepared showing a larger value for the stock-in-trade. The Commissioner of Taxes treated the increase i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y decided and I express my dissent from that decision for the reasons I have already given. I shall then proceed to consider the argument addressed on behalf of the assessee that in any event there was no cash receipt and the assessee merely received fully paid up shares of the company in consideration of the sale. It was submitted on behalf of the assessee that the second proviso to section 10(2)(vii) of the Indian Income-tax Act does not apply to a case in which the sale proceeds were given in the shape of paid up shares and not in terms of cash. I am unable to accept this argument as correct. Profit in the legal sense are received in the shape of money or money's worth. It is well established by numerous authorities that income received in kind as well as in cash and receipt of anything equivalent of cash is receipt of income. In Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159 a company which was formed for acquiring and re-selling properties sold certain property for fully paid shares in another company and it was held that the difference between the purchase price of such property and the value of the shares for which the property was exchanged was a pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son for reducing its valuation, it was not correct to say that for that reason it could not be valued in money for income-tax purposes in that year. In the course of his speech Viscount Simon observed as follows: In my view, the principle to be applied is the following. In cases such as this, when a trader in the course of his trade receives a new and valuable asset, not being money, as the result of sale or exchange, that asset, for the purpose of computing the annual profits or gains arising or accruing to him from his trade, should be valued as at the end of the accounting period in which it was received, even though it is neither realised nor realizable till later. The fact that it cannot be realised at once may reduce its present value, but that is no reason for treating it, for the purposes of income-tax, as though it had no value until it could be realised. If the asset takes the form of fully paid shares, the valuation will take into account not only the terms of the agreement, but a number of other factors, such as prospective yield, marketability, the general outlook for the type of business of the company which has allotted the shares, the result of a contemporary p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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