TMI Blog1973 (6) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... September 27, 1954, a private limited company by name " I. I. Iyyappan Mills Ltd." was incorporated with a capital of Rs. 5 lakhs. The objects of the company were to acquire and take over the business which the assessee carried on as going concerns. The assessee was one of the promoters. On December 1, 1954, a deed of assignment was executed by the appellant in favour of the managing director of the company, Mr. Lonappan, transferring all his business with their assets and liabilities as going concerns for Rs. 5 lakhs. According to the deed, the consideration was paid by the allotment of 200 fully paid up shares of Rs. 2,500 each to the persons directed by the assessee. The assessee retained five shares of the value of Rs. 12,500. The other persons to whom the shares were allotted are his near relations. The Income-tax Officer held that the assessee sold away the assets which were previously used for his business in respect of which depreciation was allowed and in the transaction of sale to the company he realised a profit of Rs. 61,330. He, therefore, included this amount in the total income of the assessee for the previous year to the assessment year 1956-57. On appeal by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force. " A reading of these provisions shows that all depreciation actually allowed to the assessee under the Act shall be deemed to be the profits of the previous year in which the sale took place if the sale amount exceeds the written down value. The first contention that is urged by the counsel on behalf of the assessee is that the transaction evidenced by the deed of transfer dated December 1, 1954, does not amount to a sale and, therefore, there is no scope for applying the provisions of section 10(2)(vii). The operative portion of the transaction reads as follows : " And the buildings relating thereto, machinery and other mechanical articles and equipments, tools, furniture, safes, necessary records, stocks in hand, cash in hand, van, car, bullock-carts, bulls, country crafts, small boats, iron cart and all other manner of things used for the purpose of the above establishments, push carts, etc., and all assets inclusive of the liabilities and outstandings described in schedules C D an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down value of the asset, proviso 2 to section 10(2)(vii) would ex facie be attracted. Where the person carrying on the business transfers the asset to a company in consideration of allotment of shares, it would be a case of exchange and not of sale, and the true nature of the transaction will not be altered, because for the purpose of stamp duty or other reasons the value of assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to the transferor. In that case there are in truth two transactions-one a transaction of sale and the other a contract under which shares are accepted in satisfaction of the liability to pay the price. Section 10(2)(vii), proviso 2, on the plain terms used therein, is attracted if there be sale of the building, machinery or plant and the amount for which the sale takes place exceeds the written down value of the assets transferred. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax v. R. R. Ramakrishna Pillai. The law on the point is again stated by the Supreme Court in Commissioner of Income-tax v. B. M. Kharwar thus : " It is now well-settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as 'the substance of the matter'. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction'. This principle applies alike to cases in which the legal relation is recorded in a formal document and to cases where it has to be gathered from evidence- oral and documentary-and conduct of the parties to the transaction. These principles apply here. The business assets belonged to the assessee. They were transferred to a private limited company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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