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TMI Blog1968 (9) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... . 100 each, to the then partners and a further allotment of 25,000 redeemable, cumulative and preferential shares of Rs. 100 each to the said the then partners, vendors. The firm was originally assessed with respect to its income for the year 1947-48 on August 28, 1948. About one year before the said order, the deed of partnership admitting the limited company as a partner was registered with the income-tax department on August 8, 1947. The original assessment proceeding was with respect to the year ending on March 31, 1947. No assessment was made with regard to capital gain, if any, made by the assessee-firm by the said sale to the limited company. Hereafter, the phrase " the limited company " would mean " Gillanders Arbuthnot & Co. Ltd. ", and the phrase " assessee-firm " would mean the assessee-firm, Messrs. Gillanders Arbuthnot & Co. Subsequently, a notice under section 34(1)(a) was issued on May 2, 1949, to reopen the said assessment for the year 1947-48, as capital gain to the firm by the sale aforesaid escaped taxation. Before the Income-tax Officer the assessee-firm appeared through its representatives. The assessee-firm also filed a return showing the same income as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record, that the assessee failed to disclose all material facts which he admitted later and therefore the Income-tax Officer was quite justified in issuing a notice under section 34(1)(a). It was further urged before the Assistant Commissioner that the transaction was not a sale in the commercial sense and therefore the said provision (section 34) would not apply. The Appellate Assistant Commissioner overruled all these objections and determined the total value of the shares sold to the limited company to be Rs. 2,04,72,500 ; regarding cost price of the said shares, securities and goodwill to the assessee, the appellate authority agreed with the Income-tax Officer and found the same to be Rs. 1,34,63,376 and thus capital gain was found to be Rs. 70,09,124. The result was that the appeal was allowed and the capital gain was reduced by Rs. 33,07,622. Against the order of the appellate authority, there was an appeal by the assessee-firm to the Tribunal. The Tribunal found that the totoal amount of capital gain of the assessee-firm by the transaction aforesaid would be Rs. 46,76,784, the shares of the limited company being each valued at Rs. 187.50 each. Against the order of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We shall now refer to the first question. " 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 ? " This question was at the instance of the assessee. The assessment year in question is 1947-48. Dr. Debi Pal says, the law that would govern the assessee with respect to income, profits or gains earned during any year would be the law as on April 1, 1947. In Karimtharuvi Tea Estates Ltd. v. State of Kerala it has been held by the Supreme Court that, " it is well settled that the Income-tax Act as it stands on the 1st day of April in a financial year must apply to the assessment of the year." Section 34 of the Income-tax Act was amended in 1939 and in 1948. We shall, for our present purpose, refer to the said section as in 1939 as " the old section 34 " and as it stands after 1948 as " the new section 34 ". Dr. Debi Pal then referred to C.A. Abraham v. Income-tax Officer, Kottayam and to Kalawati Devi Harlalka v. Commissioner of Income-tax, where the Supreme Court considered the meaning of the word " assessment ", and Dr. Debi Pal urges that all the sections in Chapter I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said point before the Income-tax Officer, the Union of India had enough time to issue or cause to be issued another notice under the old section 34, to the assessee. We may remember that the notice was sent on May 2, 1919. Original assessment for the year 1947-48 was completed on August 18, 1948. The Union of India would not now be competent to issue another notice under the old section even if that would be required by law. Hence, the Union of India would lose a valuable right for no fault of itself. It would therefore be improper to allow the assessee to raise this new question or even this new aspect of the question, after a period of 19 years when the other party may have lost a valuable right not because of negligence of itself, but because of negligence or unfair conduct of the assessee in not raising the same at the proper time. Secondly, we are of opinion that the question is a new question and not a new contention nor a new aspect of the question No. 1 referred to. It is one thing to say that right, vested or otherwise, is or was acquired under old section 34 and it is quite a different thing to say that a notice under new section 34 is or was not valid. The inquiries wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that on a notice under the new section 34, the Income-tax Officer in May, 1949, could reopen any assessment within four years of the assessment year under certain circumstances and within 8 years under certain other circumstances. There, is a clear provision that the Income-tax Officer was authorised to issue a notice under section 34(1)(a) on May 2, 1949, in cases where the previous assessment was for the year 1947-48. I may also refer to Ahmedabad Manufacturing & Calico Printing Co. v. S. G. Mehta, Income-tax Officer, where it has been held that, " they (sections 34 and 35) do not create an exemption in favour of the assesssee or grant an absolution on the expiry of the period. The liability is not enforceable but the tax may again be exigible if the bar is removed and the taxpayer is brought within the jurisdiction of the said machinery by reason of a new power. " Besides, on the date the notice under section 34(1)(a) was issued (May 2, 1949), no vested right under the old or new section had been acquired by the assessee because 8 years or 4 years had not till then passed. Hence, the proceeding under section 34(1)(a) was then validly initiated. The question urged before the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Officer may be a court within the meaning of that Act, the proceeding before him is not quite a " judicial proceeding " but the Supreme Court has considered it to be an administrative one (referred to S. S. Gadgil v. Lal and Co. 2) but even then the principles underlying there sections of the Evidence Act would apply. There is, thus, law determining relevancy of facts. The Tribunal has considered that certain materials were not then disclosed. These materials are relevant matters but, according to Dr. Pal, the said material facts refer to sub section (2) of section 34 and relates to computation. No question of computation according to Dr. Pal arises on the inference of the assessee. It did not disclose those matters as unnecessary ; but as the Tribunal has considered those relevant matters to be material facts for disclosure, whether righty or wrongly, we cannot interfere with this finding, unless the Tribunal has taken into account some facts which according to law are not relevant. The facts taken into consideration by the Tribunal may be unnecessary for the purpose of section 12B(1) but they were relevant for the purpose of section 12B(2) ; facts relevant for an enquiry whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmerly realised their profits through the medium of the firm and after the so-called sale, the same persons would realise their profits in the same business, through the medium of a limited company or, to be more accurate, through the media of the limited company as well as of the firm. For this purpose he refers to the decision in Commissioner of Income tax v. Mugneeram Bangur & Co. which is a decision of a Bench of this court. The question there related to the interpretation of section 10(2)(vii). He also refers to the decision of the Bombay High Court in Rogers & Co. v. Commissioner of Income-tax and Commissioner of Income-tax v, Sir Homi Mehta's Executors. But we are now concerned with section 12B. Section 12B, at the relevant time, was as follows : " (1) The tax shall be payable by an assessee...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 before the 1st day of April, 1948." This part of the section, prima facie, includes all sorts of transfer whether by act of parties or by operation of law. But even though the operative portion of the section is wide, its operation has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re readjustment of business relation of the parties. It is not necessary to discuss all the cases of the aforesaid type because all those cases are under section 10(2)(vii) where the phrase used by the legislature is " actually sold ", the word sale is there qualified by the word " actually ". The Bombay High Court, while considering this matter in Rogers & Co. v. Commissioner of Income-tax or in Commissioner of Income-tax v. Sir Homi Mehta's Executors, had to find out whether there was " actually " a " sale ". In the aforesaid cases under section 10(2)(vii) of the Act there were transfer deeds, and the transfers appeared to be sales but the court had still to enquire whether what appeared prima facie to be a sale was " actually " so. In determining that matter it was held that in the said section 10(2)(vii) a " sale " should be in the commercial sense and not merely in the legal sense. In Rogers & Co. v. Commissioner of Income-tax, the partners of a firm transferred assets to a limited company and it was found that the said partners were shareholders of the limited company and it was decided that it was not a sale in the commercial sense. It was merely a readjustment of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration and it cannot therefore be stated that the phrase " sale, exchange or transfer " must be a sale, exchange or transfer in the commercial sense, not in the legal sense. So the question, whether a sale by the partners of a firm to a limited company where the partners are the shareholders of the company would be considered to be " actually " a " sale " or not, does not arise in this case. In section 12B we have the phrase " sale, exchange or transfer ". In the provisos we get a list of transactions which, though " a sale, exchange or transfer ", would not come within the category of that phrase for the purpose of section 12B. A transfer by a parent limited company to a subsidiary company has been exempted by a provision. A similar transaction by a parent firm to a subsidiary firm has not been granted similar relief, it may be unfair or unjust not so to include. Then again, where the partners of the firm have transferred capital assets to a limited company, which is undoubtedly a different legal person, the question is, can the court by way of construction add something to the list of exemptions which is not there. I have no doubt that the answer must be in the negative. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bound by the aforesaid principle of interpretation by the Supreme Court. In such circumstances we do not think it is necessary to discuss all the cases on section 10(2)(vii) which have been relied upon by the learned advocates on either side. We agree with Mr. Pal that the sale in question was a real sale because the real partners transferred to a juristic person, namely, the limited company ; the subject-matter sold was equally real and the consideration for the sale was also real. On the third question Dr. Debi Pal's point may at its highest be stated as follows : No capital gain accrued to the assessee-firm by the aforesaid transaction. The shares and securities were sold by all the partner of the firm, i.e., the firm. The price was stipulated at Rs. 75 lakhs. But that was not paid. In lieu of Rs. 75 lakhs, the company allotted its shares to the partners of the firm. The value of the shares of a company depends upon its capital assets. The capital assets of the firm, at that time, were the shares and securities sold. Hence, the partners sold the shares and securities and they as shareholders got them back in the cover of the shares of the limited company. The partners tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per meaning of the word 'sale'. Whether it resulted in profit or not it came within the purview of section 10(2)(vib). " Similarly, in section 12B where the word used is " a sale " and the transaction satisfied all the elements of a sale, the question is whether there was capital gain or not will depend on computation as in section 12B(2). The second term of the agreement for sale is as follows: " In consideration of the sum of Rs. 14,90,000 the existing partners shall admit the company as a partner in the firm......the share of the company in the goodwill and in the profit of the firm being 99% thereof. " This transaction is not the form of a transfer by the firm. On payment of the aforesaid sum a particular partner was admitted. So far as the firm is concerned it is a matter of reconstitution of the firm. So far as the "existing partners " of the firm are concerned, each of them might have sold his share in the goodwill except to the extent of 1/4%. Hence, the transactions would be sales of their shares in the goodwill of the firm. But the firm is the assessee and not the partners. The partners might have individually made capital gains by sale of goodwill, but not the firm. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the shares and securities might have been available to the firm but they became the property of the limited company and not of the firm. By the transfer of goodwill, the partners lost it but the firm retained it, till dissolution. The Fifth Question. Coming now to the last question regarding the computation of capital gain we have to find out the value of the stocks and shares, sold to the company, we are asked by Mr. Pal to take into consideration the " full value " of the shares of the limited company. Mr. Pal has referred to the following observation of the Supreme Court in Commissioner of Income-tax v. George Henderson & Co. Ltd. The expression " full value " of consideration for which sale, exchange or transfer of capital assets is made appearing in section 12B(2) of the Indian Income-tax Act, 1922, does not mean the market value of the assets transferred but the price bargained for by the par ties to the sale. According to Mr. Pal, the sum of Rs. 75 lakhs was never intended to be paid ; hence the " full value " of the shares allotted would be market value of the shares of the limited company and Mr. Pal says the market value of the limited company should be at Rs. 175 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the goodwill so far as the assessee-firm is concerned either in form or in substance. The intention was that the firm would retain 100% of its goodwill till it is dissolved and on dissolution the limited company would gain 100% goodwill. So far as the assessee-firm is concerned, goodwill of the firm will be transferred to the limited company on the dissolution of the firm and not before that, but the shares of the then partners in the goodwill were transferred to the limited company to the extent specified; the said partners are not the assessees. Hence, there was no question of capital gain so far as goodwill is concerned on admission of a partner into the firm. We, therefore, answer the fifth question in the negagtive, and hold that the capital gain amounted to Rs. 27,04,272. The third question is answered in the affirmative with respect to the sale of investment and in the negative so far as admission of the company as a partner in the assessee-firm. Hence, our answer to question No. 1 is in the affirmative, to question No. 2 is in the affirmative, to question No. 3 is in the affirmative, so far as the transfer of investments, and in the negative so far as the admission of th ..... 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