TMI Blog1980 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... see was not entitled to any relief on the basis of the two circulars relied on by it? (6) Whether the transfer of a going concern is liable to tax under section 45 of the Income-tax Act, or under section 41(2), or is it realisation sale, which is not liable to tax? " We are concerned in this case with the assessment year 1967-68, the previous year being financial year ending on 31st March, 1967. The assessee is a partnership firm. A private limited company by the name of Artex Mfg. Co. P. Ltd. was formed with a view to take over the business of the assessee as a running concern, and the assessee is M/s. Artex Manufacturing Co. An agreement was made between the partnership firm and the limited company on March 31, 1966. In accordance with this agreement, the business carried on till that date by the assessee-firm was sold to the company as a going concern and the partners of the erstwhile firm became shareholders of the company. The partners were given shares in the same proportion in which the partners shared the profits or losses of the firm. The net purchase consideration was fixed at Rs. 11,50,400 and this amount was paid in the shape of 11,504 fully paid equity shares of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " company ". The recitals in the agreement mention, inter alia, that the vendors had for some time past been carrying on the business of manufacturing art silk cloth at New Cotton Mill, No. 1 Compound, outside Raipur Gate, Kankaria Road, Ahmedabad, under the firm name and style of Artex Manufacturing Company and it has also been recited that the company had been formed under the Companies Act with a nominal capital of Rs. 30,00,000 divided into 30,000 shares of Rs. 100 each and the company was formed with a view, amongst other things, to acquire and take over as a going concern the assets and liabilities of the firm " Artex Manufacturing Co." and to carry on the business conducted by the said firm. It appears from the recitals that the firm had rented buildings and measuring about 2,300 square yards and it had also stores, stock-in-trade, outstanding contracts, book debts, etc., together with the liabilities and including the overdraft and hypothecation accounts with the United Bank of India Ltd. and it was agreed between the parties that the vendors should sell and the company should purchase all the rented premises taken on monthly rent from the Ahmedabad New Cotton Mills Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,46,549 and these liabilities totalled to Rs. 30,23,573 and the excess of assets over liabilities came to Rs. 11,50,400. It has also been pointed out by the ITO that the plant, machinery and dead stock as re-valued came to Rs. 15,87,296 whereas the written down value of the plant, machinery and dead stock as per the assessee's books came to Rs. 4,36,896 and hence the difference between the valuation put by the valuers, M/s. Hargovandas Girdharlal, and the written down value, was Rs. 11,50,400. In a separate table prepared by the ITO for determining profits under s. 41(2) of the I.T. Act it was pointed out that the amount for which the plant, machinery and dead stock were transferred came to Rs. 15,87,296 whereas the written down value as per income-tax records was Rs. 3,32,276. Thus, the difference came to Rs. 12,55,020 and that was the income which was brought to tax under s. 41(2) of the Act, but the ITO proceeded on the footing that for the purpose of s. 41(2), the balancing charge came to Rs. 11,50,400. The principal question that we have to ask ourselves is as to whether the principle laid down by the Supreme Court in B. M. Kharwar's case [1969] 72 ITR 603 would apply to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al relation arising from a transaction alone determined the taxability of receipt arising from the transaction. The observation was casual and it was not necessary for the purpose of the case. As regards the liability to tax of the transaction, it was held that where machinery of a factory belonging to a firm was transferred to a private limited company, assuming that thereby readjustment of the business relationship was intended, the liability to be taxed under the second proviso to s. 10(2)(vii) of the Indian I.T. Act, 1922, in respect of the readjustment had to be determined according to the strict, legal form of the transaction. The company was legal entity distinct from the partnership under the general law, the transfer of the machinery was by the firm to the company, and the legal effect of the transaction was to convey for consideration the rights of the firm in the machinery to the company. If the transaction resulted in excess realisation over the written down value of the machinery to the firm, the liability to tax, if any, arising under the Act could not be avoided merely because in consequence of the transfer the interest of the partners in the machinery was substitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of the land, there war, nothing to show that that represented the market value of the land. In arriving at its conclusion the Supreme Court held that the facts in Mugneram Bangur's case, [1965] 57 ITR 299 were very similar to the facts of the case which came up before the Privy Council in Doughty v. Commissioner of Taxes [1927] AC 327. After quoting extensively from the decision of the Privy Council in Doughty's case [1927] AC 327, Sikri J., as he then was, speaking for the Supreme Court, observed at p. 305 of the report: " It follows from the above that once it is accepted that there was slump transaction in this case, i. e., that the business was sold as a going concern, the only question that remains is whether any portion of the slump price is attributable to the stock-in-trade." It was argued before the Supreme Court in Mugneeram Bangur's case [1965] 57 ITR 299 by counsel appearing on behalf of the revenue that there was profit attributable to the sale of land which was the stock-in-trade of the vendors. It was first contended that in the schedule to the agreement the value of the land and the value of goodwill and other items was specified. It was contended that alt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The agreement of sale was dated July 7, 1948, and thereafter the transaction of transfer by the partnership firm to the limited company had taken place and the provisions as to capital gains were introduced in the Indian I.T. Act, 1922, only in 1956. Hence, the only question before the Supreme Court in Mugneeram Bangur's case [1965] 57 ITR 299 was whether under the provisions relating to balancing, charge under s. 10(2)(vii), prov.(ii), similar to s. 41(2) of the I.T. Act, 1961, the amount could be brought to tax. The Supreme Court was not concerned with the question of capital gains on the properties. The same was: the position in Doughty's case [1927] AC 327 (PC) and the same was the position before the Supreme Court in CIT v. West Coast Chemicals and Industries Ltd. [1962] 46 ITR 135. All these decisions, namely, Mugneeram Bangur's case [1965] 57 ITR 299 (SC), Kharwar's case [1969] 72 ITR 603 (SC), West Coast Chemicals case [1962] 46 ITR 135 (SC) and Doughty's case [1927] AC 327 (PC), were considered by a Division Bench of this High Court in Sarabhai M. Chemicals P. Ltd. v. P. N. Mittal, Competent Authority IAC (Special Civil Application No. 1394 of 1973 with Special Civil Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 41(2) or equivalent provisions of the Indian I.T. Act, 1922, being attracted to such a transaction." It was pointed out that in Killick Nixon-and Co. v. CIT [1963] 49 ITR 244 (Bom), a Division Bench of the Bombay High Court dealt with a transaction where a partnership firm sold all its assets and liabilities including goodwill and other contracts to two companies in consideration of the allotment of shares to the value of Rs. 90 lakhs and it was pointed out by the Division Bench that if the sale even of the business as a whole, included a sale of the capital assets of the business, the gain arising on such sale as was attributable to the capital assets would be a capital gain. Thus, it is clear that if at all there is any surplus in the sense of excess of the consideration for the transfer of the business of the undertaking over the cost of acquisition of the business or undertaking within the meaning of s. 45 of the I.T. Act, 1961, there would be capital gain and such capital gain would be taxable in the hands of the assessee, that is, in the hands of the firm which transferred its business to the limited company. There cannot be any question of any balancing charge arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and also in the light of the decision in Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790 (SC), the principle of mutuality which was pleaded for on behalf of the assessee will not apply in this case and hence the assessee was liable to be taxed on the facts of this case. The only other point which remains to be dealt with is the question of the status in which the assessee can be taxed as regards capital gains. It is clear that the assessee-firm was a firm carrying on business which it transferred with effect from April 1, 1966, to the private limited company of Artex Private Limited. After April 1, 1966, the partnership firm had no business which it was going to carry on and its business together with its assets and liabilities stood transferred to the private limited company with effect from April 1, 1966. It is clear that under s. 42(b) of the Partnership Act, subject to contract between the partners, a firm is dissolved if constituted to carry out one or more adventures or undertakings, by the completion thereof. In this case, with effect from April 1, 1966, the business of the partnership firm no longer existed and, therefore, under s. 42(b), the firm stood dissolved, and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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