TMI Blog1965 (9) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... he private limited company which took over the said business have the same persons as its shareholders, and their respective interests in the limited company are the same which they had in the assessee-firm. One of the assets taken over by the limited company was machinery, the written down value of which stood at ₹ 9,962 in the books of account of the assessee-firm. The machinery was taken over by the limited company at the value of ₹ 62,232. It is an admitted fact that the total amount of depreciation allowed in respect of the machinery in the preceding years came to ₹ 40,743. The original cost of this machinery was ₹ 51,605. The Income-tax Officer applied the second proviso to section 10(2)(vii ) and brought to tax the aforesaid amount of ₹ 40,743 as profits of the previous year in which the company took over the said business and the machinery. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. At the time of the hearing before him, it was pointed out to him that the income-tax authorities, while assessing the limited company, had applied the proviso to section 10(5)(a) so as to take the cost of the machinery in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the sale took place. In respect of property which is sold, the basis of the allowance is the excess of the written down value over the sale price. It is necessary, however, that the business, to the assets of which the allowance under clause (vii) relates, should have been carried on for at least some part of the relevant accounting year and, under the first proviso, it is necessary that the amount claimed by way of an allowance under this clause is actually written off in the assessee's books. The principle on which the second proviso is based is that the assessee should be recouped of his capital cost of building, machinery and plant by the depreciation allowances given under clauses (vi) and (via), the allowance under clause (vii) and the sale price or the scrap value, when he sells these assets or demolishes or destroys them. Where, therefore, an assessee is able to recover in full the written down value out of the sale proceeds, he would not be entitled to claim the allowance under clause (vii), for clause (vii) is intended only to recoup the balance of the cost after deducting the total depreciation allowances. What the second proviso does is to provide that if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to a sale, there would be no question that the second proviso would apply and the excess between the sale price and the written down value would be chargeable as profits. The contention of the revenue was that the sale contemplated by the second proviso to section 10(2)(vii) is a transfer for a price, that there was in law a sale and that, therefore, the second proviso would come into play. That contention, however, was repelled, the learned judges observing that in transactions which came up for consideration in a taxing statute, the court had to look at the real nature of the transaction and not merely at its legal form. They observed that if the real nature of the transaction before them was examined, although the transaction would in law amount to a sale, substantially and really it is only a readjustment made by certain persons so as to carry on business in one form rather than in another. The learned Chief Justice, who spoke for the Bench, stated that there were eleven partners who were carrying on business as a firm. Those very eleven persons made up their minds to readjust their business position nd to carry on the identical business, the identical activity, by me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of the position of the assessees qua their business ? There is no indication given by the legislature that the expression 'sale' in this second proviso should be construed, not from the point of view of the ordinary canon of construction laid down with regard to taxing laws, but according to some special canon of construction. In our opinion, if Homi Mehta's case (supra) correctly laid down the law, then we must come to the conclusion that the transaction effected between the firm of Rogers Co. and the private limited company was not a sale, and if it was not a sale the provisions of the second proviso are not attracted . On this principle, they further held that since there was no sale, the mere book entry in the books of the company that the value of the assets of the firm taken over by the company was ₹ 4,85,354 would not have any bearing on the question of depreciation to which the limited company was entitled. From a commercial point of view, the value of the assets continued to be ₹ 3,81,848 notwithstanding the transaction in question. The entries made in the books of account did not represent the real nature of the transaction as far as the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... himself. The assessee also contended that the transaction was in reality a slump transaction entered into merely for the purpose of carrying on business more conveniently, and relied upon the decision in Doughty v. Commissioner of Taxes [1927] AC 327 . Of the four questions which were referred to the High Court, questions Nos. 3 and 4 were as follows : (3) Whether, on the facts and circumstances of this case, by the sale of the whole business concern, it could be held that there was taxable profit in the sum of ₹ 2,50,000 ? (4) Whether, on the facts and circumstances of this case, and in view of the findings of the Tribunal that the entire share capital of the vendee-company (excepting seven ordinary shares) was taken over by the vendor firm in lieu of the sale price of the business as a whole, there was any profit in the amount of ₹ 2,50,000, the same being taxable under the Indian Income-tax Act ? The High Court, following Doughty's case (supra) held as regards the third question that the transfer was a slump transaction and that, therefore, the amount of ₹ 2,50,000 could not be said to be taxable profit. Regarding question No. 4, the High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociation including seven buses were transferred to the company. The written down value of the buses in the books of the association was ₹ 24,302 and their value was shown in the books of the company at ₹ 70,000. The revenue authorities, applying the second proviso to section 10(2)(vii), assessed the difference between ₹ 70,000 and ₹ 24,302, i.e., ₹ 45,698, as profits of the association of the year in which the transaction of transfer took place. The High Court held that what the second proviso to section 10(2)(vii) did was to bring to charge the profits that a vendor made from the vendee as a result of the sale. If no sale or profit in the commercial sense occurred because of the virtual identity of the vendor and the vendee, the second proviso would not operate and the tax liability would not arise. The High Court further held that though the association and the private limited company were different legal entities and in the strict legal sense of the term there was a sale of the buses by the association to the company, since the persons who owned the buses before and after the transfer were identical in substance and effect and in the commercial se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and the company were distinct legal entities and that the sum in question was rightly assessed to income-tax. This decision, however, cannot assist the learned Advocate-General, because so long as the decisions in Sir Homi Mehta's Executors' case (supra) and Rogers Co.'s case (supra) are not reversed by the Supreme Court and hold the field, they are binding upon us as they are decisions given prior to May 1, 1960. The learned Advocate General on the footing that those decisions are binding upon us, however tried to distinguish the case of Rogers Co. (supra) as also the decisions of the Calcutta and Kerala High courts on two grounds (1) that in the case of Rogers Co. ( supra)the firm was dissolved on the company, i.e., the transferee, taking over its business, and (2) that in all those cases, the entire business and not a part of it only was transferred and taken over by the company. He argued that the principle laid down in the case of Rogers Co. ( supra)would be applicable only where the totality of the business of the transferor entity is brought to an end and that that principle would not apply so long as the transferor entity continues to car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after, the company took over that business. It may be that the Surat business might have purchased yarn and sold it, but that must be only incidental and as part of the business of manufacturing art silk cloth and its sale. It is, therefore, not possible to say that the entire business carried on by the firm at Surat, namely, the manufacturing of art silk cloth and sale thereof was not taken over by the company. Though a trading firm is assessed under section 10(1) under the main head of business, there would be cases where such an assessee would be carrying on several businesses and even having both a business as well as a profession. In such a case, it is well settled that the profits of each distinct business have to be computed separately. It is true that income-tax is chargeable under section 10(1), not on the separate income of each and every distinct business, but on the aggregate of the profits of all the businesses carried on by an assessee. But that is done by lumping together the profits of all the separate and distinct businesses and bringing the aggregate of the business profits to tax. Nevertheless, where an assessee carries on several businesses or both a business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iples are accepted, it would make no difference whether only one business out of the several businesses was taken over by the company or the entire lot of the businesses and whether the firm was continued or not for carrying on the rest of the activities. If the two entities are one and the same or substantially the same and the taxing laws permit raising the corporate veil, it would not, in our view, make any difference if the assessee were to carry on his business partly in one form and party in another form. The question and the basic question that would arise is whether the transaction in question, was a sale in the commercial sense between two different entities and whether it resulted in profits. That being the basic principle, the two points of distinction relied upon by the learned Advocate-General cannot be sustained and we must hold that, even in the case of a transaction which involves transfer of one of the businesses out of the several, the principle laid down in Rogers Co.'s case (supra) and in Sir Homi Mehta's Executors' case (supra) would apply. As regards his contention that there was an oblique motive in the assessee-firm making an arrangement for th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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