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TMI Blog1962 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ess became less and less due to war conditions, and the assessee-company began to manufacture plywood chests for tea, paints and lemon-grass oil. These were contemplated by clause (3) of the memorandum of association. On May 9, 1943, the assessee-company entered into an agreement with one Rao Sahib Natesa Iyer for the sale of the lands, buildings, plant and machinery of its match factory for Rs. 5,75,000. It was agreed that the price would not include manufactured goods, chemicals and other raw materials or any other asset not shown in the agreement of sale. The purchaser was allowed sixty days for the payment of the balance of the price, Rs. 57,500 having been already paid at the time the agreement was entered into. The purchaser made a default in payment, and on August 9, 1943, a fresh agreement was entered into by the parties, this time for a consideration of Rs. 7,35,000, and the sale included chemicals and paper for manufacture, which had not been sold in the first instance. In a confidential report made on August 1, 1944, to the shareholders, the directors stated that the price obtained had shown a capital appreciation of about six times the cost price, and the sale of chem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sale of chemicals is legally warranted and whether there was legally a single transaction of the entire match factory inclusive of raw materials ? " It may be pointed out that prior to the sale of chemicals to the purchaser, the only evidence of sale of chemicals by the assessee-company was of two transactions. In the first transaction, there was a sale of chemicals on July 24, 1943, to an educational institution for Rs. 50 and another sale on October 30, 1943, to a stranger for Rs. 7-12-0. The High Court held that by the sale no business was done, and that the amount obtained was only by way of a realisation sale, and was not, therefore, liable to tax. The argument of the department (also raised before the High Court) proceeds in this way. The department refers to the memorandum of association under which the assessee-company was to carry on the business of manufacturing and selling chemicals, that in the past it had sold chemicals, that in the first sale of its assets it had excluded chemicals and some other raw materials necessary for the manufacture of matches and had sold the concern for a lesser price, that later it included chemicals and raw materials and obtained a l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company was formed with the object of acquiring rubber estates and for developing them. Under the memorandum, the company had the power to sell its properties. Two properties having been acquired and the funds having run out, they were sold but at a profit. This profit was considered as an appreciation of capital and not as assessable profit. The difference between these two cases is that whereas in the former, though the whole of the property was sold it was sold as a part of trading, in the latter, the property was sold not as part of trading but on a winding up sale. The department relies upon Californian Copper Syndicate v. Harris, while the assessee-company relies upon Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer. These cases were also considered and applied by the Privy Council in Doughty v. Commissioner of Taxes, which is relied upon by both sides, in view of certain observations of the Privy Council, to which we shall presently refer. In that case, there were two partners carrying on business in New Zealand as general merchants. They sold the partnership to a limited company, of which they were the only shareholders. The sale was of the entire assets including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re stock of sheep. He had the practice of placing on his sheep at the beginning and end of each year an arbitrary value without reference to the actual market value. When he sold his entire stock, a nominal profit of pound 5,000 odd appeared, and he was assessed on it. The Supreme Court held that it was not an accretion to capital but a profit on the sale of the appellant's stock-in-trade. Sir John Salmond, who delivered the judgment of the court, observed that the holding of a sheep farmer was not a capital holding, but his sheep represented a stock-in-trade, and since every appreciation of a stock-in-trade represented a profit assessable to income-tax, it mattered not that the stock-in-trade was sold at once or from time to time. Of this case, the Privy Council in Doughty's case did not say much, but enough to cast a doubt upon it. This is what the Privy Council said at page 335 : " It would be difficult to arrive at the profit in this way if it were the case of a farmer in England ; but the trade of a pastoralist is one with which the New Zealand courts would be familiar, and which it would be more easy for the New Zealand judges than for their Lordships to appreciate. " The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioners could arrive at their finding that trading was, in fact, being carried on. Lord Buckmaster, speaking of the facts in that case, observed as follows : " For in truth it is quite plain that right up to the end of 1917 they were engaged in trading which, so far as the external world is concerned, was the ordinary method of carrying on trade modified only by arrangements which were merely part of the machinery of business dealing adopted to effect their intention to retire. It may well be accepted that they did so intend ; yet the intention of a man cannot be considered as determining what it is that his acts amount to ; and the real thing that has to be decided here is what were the acts that were done in connection with this business and whether they amount to a trading which would cause the profits that accrued to be profits arising from a trade or business ? " The case was, therefore, decided on the finding of the Special Commissioners, for which there was enough material in evidence. Similarly, the case of Commissioners of Inland Revenue v. " Old Bushmills " Distillery Co. Ltd. (in liquidation) was one decided on a finding, in support of which there was evidence. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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