TMI Blog1960 (1) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... The manufacture of matches having become unprofitable the company on May 9, 1943, entered into an agreement with one Rao Sahib Natesa Iyer for the sale of the lands, buildings, plant and machinery relating to manufacture of matches. The consideration was fixed at ₹ 5,75,000 and out of that amount, ₹ 57,500 was payable as advance, and the remaining sum to be paid within sixty days from the date of the agreement. It was further agreed that the price should not cover the manufactured goods, chemicals, other raw materials, or any other assets not described in the schedule to the agreement. Nevertheless the intended purchaser committed default, and on August 9, 1943, a fresh agreement was entered with the same person for the sale consideration of ₹ 7,35,000. The second agreement purports to condone the default because of the circumstances being beyond the purchaser's control and to sell in addition to what was covered by the earlier agreement chemical and paper for match manufacturing. After the sale had been concluded, the director's confidential report of August 1, 1944, to the shareholders showed the price to have given a capital appreciation of about six t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to the High Court and under section 113(1) of the Travancore Income-tax Act, 1121, the following two questions have been referred : (1) Whether the transaction of sale of the raw materials along with the business, including machinery, plant and premises, is a revenue sale and whether in the facts and circumstances of the case, the sum of ₹ 1,15,259 has been rightly charged to income-tax? (2) Whether the decision, that the sale of match machinery and premises, was distinct from the sale of chemicals, is legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials? The statement of facts sent along with the two questions was found meagre by the High Court and the Tribunal was directed to state further facts which has since been done. The short point arising in this reference for consideration, therefore, is whether the sale of chemicals and the match papers by the second agreement amounts to realisation sale so as not to be liable to income-tax. But before deciding this point it would be of advantage to clear the grounds. The advocate for the Department has rightly argued that the company unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inued to pursue, and the profits of which have been taxed in the ordinary course without objection on their part. But it is clear that the sum in question in this appeal had no connexion with the continuance of the respondents' other business. The profits earned by them in 1928 were the fruit of a different tree, the crop of a different field. (p 282) Therefore, the company subsequent to the date of sale having carried on business other than match-making would not be of much importance in the reference. Coming to the main point it is clear that one test for treating a transaction to be realisation sale is to be found in Doughty v. Commissioner of Taxes [1927] AC 327. There two partners were carrying on business as soft goods merchants, and sold the business to a company in consideration of allotment of shares and the discharge of the partnership liabilities. The nominal value of the shares was more than the amount to the credit of the partnership, and the item stock-in-hand in the firm's last balance-sheet was written up and renamed stock and goodwill. The Commissioner contended that the excess was taxable profit; but it was held by the Privy Council that the sale w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that thereby the test elaborated earlier had not been discarded. Firstly because Hickman v. Federal Commissioner of Taxation [1922] 31 Com. LR 232 has been without any disapproval referred to in the judgment. There certain items were separately assessed in the sale and the High Court had nevertheless held the transaction to be single. In this connection Knox, C.J., had observed as follows : In this case it is clear from the words of the contract of 1st January, 1918, that it is an indivisible contract for the sale of the land and stock-substantially the whole of the assets of the business theretofore carried on by the appellant-and that the allocation of portion of the purchase money to the live-stock and the balance to the land, presumably made for the convenience of the parties does not convert the single contract into two-one for the sale of the land and the other for the sale of the live-stock for independent considerations. The single transaction must be treated as effecting a complete change of ownership of a continuing business and of the assets employed in carrying it on. (p 238) It is, therefore, clear that where the bargain be composite, integrated and indivisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to their respective shareholdings and treated as part of the distribution of the assets of the company in liquidation. The revenue authorities claimed that such sale of rights was a trading transaction, the profit of which was assessable to income-tax. But it was held that there was no evidence to support their decision and the realisation of the assets by the liquidator was in the performance of the duty of realising the assets. In this connection it would be also useful to have before us the following passage from Simon's Income Tax (Vol. II, pages 28 and 29, 2nd Edition : The mere realisation of assets does not constitute trading. It depends entirely on the operation involved in the realisation whether trading will be held to have been carried on. Important points for consideration generally are : (i) whether purchases were made in connection with or with a view to the more advantageous disposal of the assets, (ii) whether any actions were performed or contracts entered into which complicated the matter of realisation, or (iii) whether the method of realisation adopted was the best or only method ... We think that judged by the aforesaid tests the deal before us i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from the business of selling the chemicals. We think by adopting such methods the second agreement does not become severable so as to identify part of its consideration as the price for the raw materials ; for, had the purchaser failed to pay what the Department now assesses to be the price for the land etc. the chemicals would not have become the purchaser's property, and had there been default in payment of what is called the sale price of chemicals the sale of the machineries would not be complete. It is equally clear that until the whole amount be paid, the purchaser was running the risk of losing the whole of what had been sold by resale under paragraph 5 of the agreement. It would be difficult in these circumstances to treat the second agreement as severable and not one indivisible deal. It would be thus realisation sale according to the test laid in Doughly's case (supra). It was argued that the directors ' confidential report of August, 1944, by treating part of the consideration as capital gains and part as profits, distinguishes the case before us; but then Knox, C.J., in Hickman's case (supra) found such entry in the assessee's account books as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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