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TMI Blog1965 (3) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... iness concern it could be held that there was taxable profit in the sum of Rs. 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 Rs. 2,50,000 the same being taxable under the Indian Income-tax Act ?" The relevant facts and circumstances are these. The respondent, M/s. Mugneeram Bangur & Co. (Land Department), Calcutta (hereinafter referred to as the vendors), were a firm carrying on the business of land development in Calcutta. By an agreement dated July 7, 1948, the partners of the firm agreed to sell all the business of the said firm to the Amalgamated Development Limited, hereinafter called the vendee, which company was promoted by the partners of the firm. The relevant paragraphs of the said agreement are as follows : " And whereas the vendors have agreed to sell and the company has agreed to purchase all the said business on the basis hereinafter set out. Now it is hereby agreed and declared between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees. Thus the vendors received shares of the face value of Rs. 34,99,300 for the assets transferred to the company. The Income-tax Officer held that the sum of Rs. 2,50,000 was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock-in-trade and not goodwill as alleged. The Appellate Assistant Commissioner, on appeal, held that the said sum of Rs. 2,50,000 was the value of the goodwill. He further held that since the transfer was a transfer of business as a going concern, the profit was the capital gain and, therefore, not liable to tax. Relying on Doughty v. Commissioner of Taxes, he held that as " the transfer is a transfer of all assets of the firm to a company the transfer is a capital sale." The Income-tax Officer filed an appeal before the Appellate Tribunal. The Appellate Tribunal held that although the sale was the sale of a business as a going concern, the value of the stock could be traced, and, therefore, the profits arising out of the sale was taxable income. Regarding the goodwill, the Tribunal observed : " We do not think that there was much value of the goodwill of the business that was transferred. Mugneeram Bangur & Co. was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es no difference. In Sir Homi Mehta's case 400 shares out of 6,000 shares were allotted to Sir Homi Mehta's sons. Nor again can I see any difference in principle between the case of conversion of business into a private limited company and one in which it is converted into a public limited company, if in the latter company outsiders are not allotted any sizeable proportion of the shares issued." The High Court felt that this answer was enough to dispose of the matter, but as questions Nos. 2 and 3 had been referred, they answered them. Regarding question No. 2, the High Court held that " as the assets of the firm transferred to the company have been itemised and as there can be no question of variation of the figures given in items 3 to 8 in the agreement for sale, it must be held that Rs. 2,50,000 shown as the value of the goodwill must be represented by surplus on the sale of lands which was the stock-in-trade of the assessee-company." Regarding question No. 3, the High Court held that even if the value of the stock-in-trade taken over by the assessee was greater than the figure shown therefor in the agreement for sale, in view of the answer to question No. 4, there was no prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground, Lord Phillimore observed that " income-tax being a tax upon income, it is well established that the sale of a whole concern which can be shown to be a sale at a profit as compared with the price given for the business, or at which it stands in the books does not give rise to a profit taxable to income-tax." He further observed that " where, however, the business consists, as in the present case, entirely in buying and selling, it is more difficult to distinguish between an ordinary and a realization sale, the object in either case being to dispose of goods at a higher price than that given for them, and thus to make a profit out of the business. The fact that large blocks of stock are sold does not render the profit obtained anything different in kind from the profit obtained by a series of gradual and smaller sales. This might even be the case if the whole stock was sold out in one sale. Even in the case of a realization sale, if there were an item which could be traced as representing the stock sold, the profit obtained by that sale, though made in conjunction with a sale of the whole concern, might conceivably be treated as taxable income." Lord Phillimore concluded wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en selling it, it is easy to distinguish a realisation sale from an ordinary sale, and it is very difficult to attribute part of the slump price to the cost of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that part of the slump price is necessarily attributable to the land sold. There is no evidence that any attempt was made to evaluate the land on the date of sale. As the vendors were transferring the concern to a company, constituted by the vendors themselves, no effort would ordinarily have been made to evaluate the land as on the date of sale. What was put in the schedule was the cost price, as it stood in the books of the vendors. Even if the sum of Rs. 2,50,000 attributed to goodwill is added to the cost of land, it is nobody's case that this represented the market value of the land. In our view the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of this court in Commissioner of Income-tax v. West Coast Chemicals & Industries Ltd. and Doughty's case that no part of the slump price is taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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