TMI Blog1961 (12) TMI 93X X X X Extracts X X X X X X X X Extracts X X X X ..... he partners of the firm made a profit in the transaction which is assessable to income-tax. The assessee firm, Mugneeram Bangur Co., Land Department had been carrying on the business of land development for many years. Its business was to buy large blocks of land in the suburbs of Calcutta, develop the same and parcel out in small plots and sell at a profit. Originally it had seven partners, six of them being Bangurs and the seventh being one Charu Chandra Chatterjee. Two of the partners, namely, Mugneeram Bangur and Charu chandra Chatterjee, retired from the firm on July 11, 1945. The remaining partners were not willing to carry on the business with unlimited liability and decided to float a limited company which would take over the business of the firm. Accordingly, a new company was formed in the name mentioned above and incorporated as a public company on April 8, 1948. The five remaining partners of the firm were also the promoters of the new company which had four directors, two of them Bangurs and two being outsiders, namely, one Walter Robert Elliot and the late Sir Bejoy Prosad Singha Roy. The capital of the company was ₹ 34,99,300 divided into shares of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the date of the transfer was much more than that shown in the agreement for sale and that land was the stick-in-trade of the firm which was taken over by the company. The department's contention that the assessee firm had no goodwill or that the value of the goodwill was negligible in the circumstances of the case is based on the following: (1) Mugneeram Bangur Co., Land Department, was a firm insisting of the same partners as those constituting another firm by the name of Mugneeram Bangur Co., the only difference being that the partners had difference shares in the two firms. Mugneeram Bangur Co. also carried on business in lands and buildings and some of the conveyances purported to have been executed by the assessee firm of Mugneeram Bangur Co., Land Department, were as a matter of fact executed in the name of Mugneeram Bangur Co. From this it is sought to be inferred that the name of the firm in which the business was carried on was not a matter of any moment. (2) The name of the assessee firm is completely different from the name of the new company, there being nothing common between the two names. (3) The assessee firm carried on business at an addr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholesale soft goods merchants and drapers in partnership. In 1920 they converted their business into a private limited company, of which they were the only tow shareholders. The arrangement which was embodied in an agreement dated June 25, 1920, was that the partners as vendors should sell to the company and the latter should purchase as from January 20 then past, the goodwill of the business, the leasehold, plant, machinery, bookdebts, the benefit of pending contracts, all cash bill and notes and generally all property to which the vendors were entitled in connection with the business. Part the consideration for the sale was the allotment of shares both ordinary and preference to the two persons the residue of the consideration being the undertaking by the company to satisfy all the liabilities and engagements of the firm. The vendor contracted not to carry on the business of a draper independently of the company and further stated that they had subscribed to the memorandum of association for all the shares in the company in certain proportions, each of the partners rendering himself liable to that extent for the debts of the company. The nominal value of the shares being more t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the mere process of having their stock-in-trade valued at a high rate in transferring the same to a company consisting of their two selves. The principle that a man cannot make a profit in a transaction in which he figures both as a vendor and as a purchaser has been acted upon in India in many cases. Thus in Kikabhai Premchand v. Commissioner of Income-tax [1953] 24 I.T.R. 506; [1954] S.C.R. 219, the Supreme Court by a majority of four to one held that it was 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 was non-consistent . In this case the assessee was person dealing in silver and shares and a substantial part of his holding was kept in silver bullion and shares. He was thus sole owner of the business and his accounts were maintained according to the mercantile system under which stocks could be valued from year to year on the basis of their cost price both at the beginning and at the end of a particular year. In the course of the year 1942 the assessee withdrew some bars of silver and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 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 to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional. The principle again came up for consideration in Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 I.T.R. 928. Sir Homi Mehta owned large blocks of shares in various joint stock companies, both public and private and dealt in them both ready and forward. The cost price of these shares was ₹ 30,45,017. These shares were transferred by him to a private limited company for ₹ 40,97,000 being the market value of the shares at the date of transfer. The assets of the company included not only the shares formerly belonging to Sir Homi Mehta but also several businesses carried on by him. In return for the assets transferred, 5,600 shares out of 6,000 shares (the total number of shares issued by the company) were allotted to the assessee, the remaining 400 shares being given to his four sons at his instance. The Income- tax Officer valued the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y them in the partnership, there being a very slight difference due to rounding off to a specific number. The written down value of the block assets of the firm in their books was ₹ 3,81,848. The assets transferred to the company were valued at the original cost price of ₹ 4,85,354 and the department contended that the difference between the two figures was liable to tax by reason of the second proviso to section 10(2)(vii) of the Income-tax Act. Chagla C.J. again held that from a commercial point of view the vendor and the vendee being the same there was no sale and the transaction in substance was only a re-adjustment made by certain persons so as to carry on business in one form rather than in another.......No change he taken place except the legal change of a company taking the place of a firm. Accordingly, the court came to the conclusion the entries made in the books of account do not represent the real nature of the transaction as far as the sale is concerned; and if they do not represent the real nature of the transaction in that sense, they equally do not represent the real transaction from the point of view of the price fixed for this transaction. As ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise chargeable as a trade under Case I of schedule D of the Income Tax Act, 1918. The business of the hatchery was to produce and sell day-old chicks. They also carried on farming activities which were conceded to be, for income-tax purposes, an enterprises separate from the hatchery business and, as the law them stood, was an income- tax source chargeable under Schedule B of the Income Tax Act, 1918. Most of the produce of the Hatchery was sold, but a substantial number of day-old chicks were from time to time transferred to the farm and become part of the stock of poultry of the farm. The question in the appeal was whether, in computing the profits of the hatchery business, the day-old chicks transferred to the farm should be brought in at cost or market value. The market value was at the material time much below cost, viz., 4d. as against 7d. per chick. It was contended for the taxpayers that market price and for the Crown that cost of production should be adopted as the appropriate figure in the accounts. Macnaghten J. upheld the contention of the taxpayers. Viscount Simonds noted that this decision had every since been adopted as the basis of assessment by the revenue in si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing been received in respect of it, the only logical way to treat it is to regard it as having been disposed of by way of trade. If so, I see no reason for ascribing to it any other sum than that which would normally have received for it in the due course of trade, that is to say, the market value...The unreality of this alternative would be plan to the tax- payer, if, as well might happen, very large service fee had been paid so that the cost of production was high and the market value did not equal it. According to Lord Radcliffe the composite proposition that a man cannot make taxable profit out of trading with himself is of unquestioned validity when it is applied to the two kinds activity with which it is habitually associated in income tax history, mutual issues and certain public utilities financed by rates....The situation presented to us is a different one. for we are required to assume... that the activities to which the accounts relate do constitute a trade for income tax purposes; and our problem is to determine what upon that basis are the proper entire to make in those trading accounts in relation to certain transactions with trade stock...all things considered, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be preferred on that account. Secondly, it seems to be better economics to credit the trading owner with the current realizable value of any stock which he has chosen to dispose of without commercial disposal than to credit him with an amount equivalent to the accumulated expenses in respect of that stock. To me it seems that the principles laid down in Sharkey's case [1956] A.C. 58; 29 I.T.R. 962 run counter those in Kikabhai's case [1953] 24 I.T.R. 506 ; [1954] S.C.R. 219. It should be noted that the reasoning of Bhagwati J., in his dissenting judgment, was in line with that in Sharkey's case [1956] A.C. 58; 29 I.T.R. 962. However that may be, we are bound by the principles laid down in Kikabhai's case [1953] 24 I.T.R. 506 ; [1954] S.C.R. 219. Reliance was also placed on the judgment of the Bombay High Court in Commissioner of Income-tax v. Bai Shrinbai K. Kooka [1956] 30 I.T.R. 753. In this case the assessee had first purchased shares for investment which she converted into here stock-in-trade for the purposes of carrying on a business in shares as from April 1, 1945. She thereafter sold some of the shares in the assessment year 1947-48 and the prices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the stock-in-trade at zero hour irrespective of the method of acquisition' or the price paid therefor. Reference was made on behalf of the department to the case of Californian copper Syndicate v. Harris [1904] 5 Tax Cas. 159 and it was argued that the case before us is covered by this authority. I do not agree. The facts in this case were as follows: The company was incorporated with the object, inter alia, of acquiring copper and other mines, mining rights in California or elsewhere and any interest their and in particular to acquire the several mines mentioned in the object clause and to sell, lease, charter or otherwise dispose of absolutely or conditionally the whole or any part of the undertaking, property rights, concessions or privileges of the company for such consideration in cash, shares otherwise as the company might think fit. The company acquired copper boring land in the country of Fresno, extending over 480 acres at the price of ? 24,000 and expended the paid up capital of the company in the purchase and development of the property. Its total capital was ? 28,332 divided into as many shares of ? 1 each. The accounts showed that the cash capital of ? 4,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... field, and obtain gain by inducing other to take it up on such terms as would bring substantial gain to themselves. I do not see how the fact of the case before us can be identified with californian syndicate's case [1904] 5 Tax Cas. 159. There the object of the company was to purchase land, develop the same and sell at a profit. There was a real sale in that the vendor and the purchaser were entirely different legal entities not only from the strictly legal point of view but also from the commercial point of view. In the present case, there may be a sale from the legal point of view, but no sale from the commercial point of view. It was argued by the learned standing counsel appearing on behalf of the assessee that the case before us could be distinguished from Sharkey's case [1956] A.C. 58; 29 I.T.R. 962, in that it does not relate to the withdrawal of a portion of the assets of a business but is a case where the business in transferred to a new channel or given a new look. It is not for me to speculate as to whether the Supreme Court would have applied the reasoning in Wernher's case [1956] A.C. 58; 29 I.T.R. 962, to Kikabhai's case [1953] 24 I.T.R. 506; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t business derive their value from different consideration. The goodwill of some business is derived almost entirely from the place where they are carried on, some goodwills are purely personal, and some goodwills derive their value partly from the locality where the business is carried on, partly from the reputation built up around the name of the individual or firm or company under which it has previously been carried on. In this case, the company was neither using the name nor the place of business of the firm nor was nay agreement entered in to whereby the members of the firm undertook not to carry on a similar business. Indeed, so long as Mugneeram Bangur and Co. carried on a similar business no such undertaking could be given. In a business of this type, in my opinion, goodwill would be limited to the reputation of the persona carrying it on, for, I cannot imagine any customer approaching the firm on any other consideration. A person desiring to buy land would naturally ascribe importance to the reputation of the person who was selling it specially where the vendor's business is to sell land. If the Bangurs had acquired any reputation in the manner of developing lands ..... X X X X Extracts X X X X X X X X Extracts X X X X
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