9911796707
TMI Blog1973 (6) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee the Appellate Assistant Commissioner reached the same conclusion as that arrived at by the Income-tax Officer. It was found that a sale within the meaning of section 10(2)(vii) of the Indian Income-tax Act, 1922, has been effected and the profit realised therefrom was correctly included in the total income for assessment. On second appeal before the Tribunal it was again contended that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeds 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 and all rights, privileges and liberties existing and accruing together with all advantages for Rs. 5 lakhs. The consideration of Rs. 5 lakhs is satisfied by adjustment of sums that I am to make good to the company for having allotted and given to the persons mentioned in B schedule, 200 fully paid up shares of Rs. 2,500 each as directed by me, in their respective names and in the manner mentioned in B sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quivalent 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 there be no sale, the proviso has no application. For the application of the proviso, it is necessary to precisely determine the facts and to ascertain in which of the different categories a transaction falls. The Tribunal cannot admit a transaction which has distinct characteristics to exemption from tax liability on the broad ground that the substance of the transaction was to readjust the position of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. The company is a legal entity distinct from the assessee, transfer of the assets was by the assessee to the company and the legal effect of the transaction was to convey for consideration the rights of the assessee in the assets of his business. The transaction resulted in excess realisation over the written down value of the assets of the business within the scope of the second proviso to section 10(2)(vii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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