TMI Blog1966 (9) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... rence was profit within the meaning of section 10(2)(vii), second proviso. Appeal dismissed - - - - - Dated:- 23-9-1966 - Judge(s) : V. RAMASWAMY., J. C. SHAH., V. BHARGAVA JUDGMENT The judgment of the court was delivered by SHAH J.--Messrs. Phelps and Company Ltd. was registered as a private limited company on September 30, 1939, to carry on the business of " Clothiers and Tailors ". On March 21, 1952, under an order made under section 11(4) of the Indian Companies Act, 1913, the name of the company was altered to Messrs. Associated Clothiers Ltd. On the same day a company styled " Messrs. Phelps Co. Ltd. " was incorporated. By a written agreement also of the same date the appellant-company agreed to transfer its assets and liabilities to Messrs. Phelps and Co. Ltd., in consideration of allotment of shares of the value of Rs. 12,30,000 of Messrs. Phelps and Co. Ltd., and Rs. 23,291-10-5 payable in cash, and Messrs. Phelps and Co. Ltd. taking over liabilities of the appellant-company of the aggregate amount of Rs. 6,05,601-0-6. Under the terms of the agreement the appellant-company purported to transfer seven items of property described in the schedules annexed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll material times there were in existence two corporations which were distinct and the transfer by one corporation of its assets to another cannot be deemed to be a transfer to self ; that the transaction by which the appellant company transferred its assets to Messrs. Phelps Co. Ltd. was a transaction of sale, and the doctrine of " lifting the veil of corporate personality " had application only to a limited class of cases, and the case of the appellants could not be brought within that class ; and since the two companies " continued to exist side by side " for many years after the appellant-company had transferred its assets to Messrs. Phelps Co. Ltd., two different companies which carried on business simultaneously could not be regarded as one entity. In this appeal with certificate, the appellant-company contends that the High Court gravely erred in recording its opinion on the question submitted, relying on evidence which was never placed before the Income-tax Officer or the Tribunal. Counsel urged that the observations made by the High Court that Messrs. Phelps Co. Ltd., and the appellant-company " continued to exist side by side as two separate limited companies " and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly with his sons at the market value of the shares at that time. The departmental authorities levied income-tax on the difference between the market price and the cost price of the shares. The High Court of Bombay held that the so-called sale of the shares to the company was not a business activity entered into with the object of earning profit ; that it was not really a sale but a procedure adopted for readjustment of their position as holders of the shares ; and that the assessee did not make any profit or gain in a commercial sense by transferring the shares to the company and, therefore, the difference between the market price and cost price of the shares was not exigible to tax as profit of the business. In Rogers Co.'s case, the partners of a firm carrying on the business of manufacturing aerated waters formed themselves into a private limited company, the shares allotted to each of them in the company being in the same proportions as the shares they held in the firm. The assets of the firm were transferred to the company for a price exceeding the written down value, and the difference between the original cost of the assets and the written down value was brought to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or assets no real profit was earned. Counsel for the revenue relied upon the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax. It was held in that case that the doctrine that no man can make a profit out of himself is not applicable to transactions between a person and a limited company, even though all the shares in the company are owned by that person, because from " a legal point of view a company is an entity entirely distinct from its shareholders. " The court observed : " . . . . . . . it is not possible, in the circumstances of this case, to ignore or disregard the mask of corporate entity or to analyse the economic realities behind the transaction of sale. " Therefore, the assessee, though he was the owner of all the shares in the company, could not claim to be treated as if he were identical with the company in order to promote his own benefit or advantage. But in Maharajadhiraj Sir Kameshwar Singh's case, it seems to have been admitted that the price for which the buildings, machinery and plant were transferred to the company was not a notional figure, and the price being in excess of the cost of buildin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purview of the latter part of section 10(2)(vib). " Counsel for the company also submitted that the transaction was merely a nominal transaction and the property in the shares remained with the same company in which it was vested. This contention was never raised before or decided by the Tribunal, and it does not arise out of the order of the Tribunal. It was then urged that there was no profit to the company since there was no evidence about the market value of the property transferred and in the absence of any evidence to show that the property was sold for a price exceeding the written down value, liability under section 10(2)(vii), second proviso, will not arise. But in the agreement the properties sold were allotted specific values and no attempt was made at any time before the Tribunal to prove that the values so allotted to the various properties were not true. Substantially, the whole of the consideration paid by Messrs. Phelps Co. Ltd. is in the form of shares to the appellant-company, but unless there is evidence that the market value of the shares was less than their face value, the claim made by the appellant-company must fail. The burden of proving that the con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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