Full Judgment Text
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PETITIONER:
THE COMMISSIONER OF INCOME-TAX, CALCUTTA
Vs.
RESPONDENT:
GILLANDERS ARBUTHNOT & CO.Vice Versa
DATE OF JUDGMENT27/09/1972
BENCH:
HEGDE, K.S.
BENCH:
HEGDE, K.S.
REDDY, P. JAGANMOHAN
DUA, I.D.
KHANNA, HANS RAJ
CITATION:
1973 AIR 989 1973 SCR (2) 437
1973 SCC (3) 845
CITATOR INFO :
RF 1991 SC1806 (9)
ACT:
Income-tax Act 1922, Ss. 12B & 34--Capital
gains--Transaction whether a sale, a readjustment or an
exchange--Income-tax authorities whether can go to substance
of transaction apart from legal relationship created by
transaction--Shares--Full value of--Where there is a sale
price it must be treated as full value--Reopening of
assessment--Validity of notice under s. 24(1) (a).
HEADNOTE:
The assessee, a registered firm carrying on mostly managing
agency business, originally consisted of four partners. By
partnership deed dated February 28, 1947, a limited company
(whose only shareholders were the four partners of the
assessee firm) was taken in as a fifth partner. The company
was given a share of 99% in the newly constituted firm in
lieu of a sum of Rs. 14,90,000 to be paid by it to the
existing partners. Further, by an ’agreement of sale’ dated
February 28, 1947 the assessee firm transferred its share-
holdings to the company for a sum of Rs. 75 lakhs. The
above sums of Rs. 14,90,000 and Rs. 75 lakhs were satisfied
by the company allotting its shares to the existing partners
at face value. In respect of the assessment year 1947-48
the Income-tax Officer made originally an assessment without
taking into account any capital gains. Later he issued a
notice under s. 34 of the Income-tax Act, 1922, and made a
fresh assessment holding that the assessee firm had made
capital gains, inter alia, on the sale of its shareholding
for Rs. 75 lakhs, because, the market value of the, shares
allowed by the company to the assessee firm was much higher
than Rs. 75 lakhs, the face value. The validity of the
notice under s. 34 was upheld by the authorities as well as
in reference by the High Court. The High Court held that
the transaction in question was a ’sale’ attracting the
provisions of s. 12-B of the Act and that the capital gain
was Rs. 27,4,772 on the basis that the sale price received
by the assessee firm was Rs. 75 lakhs. In appeals filed by
the Revenue as well as by the assessee firm the questions
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that fell for consideration were; (i) whether the notice
under s. 34(1)(a) was validly issued in the circumstances of
the case; (ii) whether the transaction in question was a
‘sale’ as it purported to be under the ’agreement of sale’
or a mere readjustment as claimed by the assessee firm, or
an exchange as contended by the Revenue; (iii) whether the
capital gains were to be computed on the basis of market
value of the shares allotted to the assessee firm or on the
basis of their value as shown in the ’agreement of sale’
i.e. Rs. 75 lakhs.
HELD : (1) Though at the time of the original assessment,
the partnership deed entered into by the five partners was
before the Income-tax Officer, the sale deed executed by the
partners of the assessee firm in favour of the ’Company’ on
February 28, 1947 had not been placed before him. There was
no material before the income-tax Officer on the basis of
which he could have concluded that the assessee firm had
sold any shares and securities to the ’Company’; nor was
there any material before the Income-tax Officer as to the
value of those shares and securities as on
438
January 1, 1939. Further no material was placed before him
to show that those shares and securities had been sold to
the ’Company’ for a sum of Rs. 75 lakhs. The Tribunal and
the-High Court rightly held that the assessee had failed to
disclose fully and truly all material facts for the purpose
of ascertaining whether it bad made any capital gains or
not.[445 D]
Calcutta Discount Co. Ltd. v. Income-tax Officer, Companies
District-1, Calcutta and Anr., 41 I.T.R. 191, explained and
applied.
Commissioner of Income-tax, West Bengal and Anr. v.
Hemchandra Kar and Ors, 77 I.T.R. P. 1, Commissioner of
Income-tax Gujarat v. Bhanji Lavji, 79 I.T.R. 583 and
Commissioner of Income-tax Calcutta v. Burlon Dealers Ltd.,
79 I.T.R. 609, referred to.
(ii) Section 12-B was incorporated into the Act with effect
from April 1, 1947. That being so, at the time the sale
transaction took place s. 12-B was not a part of the Act.
Hence there was no basis for saying that the transfer was
effected with the object of avoidance or reduction of the
liability of the assessee. [447 D]
(iii) The taxing authority is entitled and is indeed
bound to determine the true legal relation resulting from a
transaction. If the parties have chosen to conceal by a
device the legal relation, it is open to the taxing
authority to unravel the device and to determine the true
character of the relationship. But the legal effect of a
transaction cannot be displaced by probing into the
’substance of the transaction’. This principle applies
alike to cases in which the legal relation is recorded in a
formal document and to cases where it has to be gathered
from evidence-oral and documentary-and conduct of the
parties to the transaction. [449B]
Commissioner of Income-tax, Gujarat v. B. M. Kharwar, 72
I.T.R. 603 followed.
Sir Kikabhai Premchand v. Commissioner of Income-tax
(Central), Bombay, 24, I.T.R. 506, Commissioner of Income-
tax, Bombay City v. Sir Homi Mehta’s Executors, 28 I.T.R.
928, Rogers & Co. v. Commissioner of Income-tax, Bombay
City-II, 344, I.T.R. 336 and Commissioner of Income-tax
(Central) _Calcutta v. Mugneeram Bangur and Company. 47,
I.T.R. 565, referred to.
In the instant case, the Tribunal had held that the
agreement for sale’ entered into between the assessee firm
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and ’company’ was a genuine transaction and the same
evidenced a sale. This was essentially a fin ding of fact
and the High Court had affirmed that finding. In that view
the contention of the Revenue that the transaction in
question was an exchange and not a sale and the contention
of the assessee that it was mere adjustment, cannot be
accepted.
Cl. (1) of the agreement in specific terms said that "the
existing partners shall sell and the company shall purchase
the shares and securities for a sum of rupees seventy-five
lakhs. Clause (3) of that agreement merely provided a mode
of satisfaction of the sale price. The sale price fixed by
the parties for the shares and the securities sold was 75
lakhs and nothing more. It may be that because of the
allotment of the shares of the Company in satisfaction of
the sale price the assessee firm got certain benefits but
that did not convert the sale into an exchange. [449 E]
Commissioner of Income-tax, Kerala v. B. R. Ramakrishna
Pillai, 66, I.T.R. 725 and Commissioner of Income-tax, West
Bengal and any. v. George Henderson & Co. Ltd. 59 I.T.R.
238, referred to.
439
For the above reasons it must be held that the transaction
evidenced by the agreement for sale between the company and
the assessee was a sale.
(iv) Under s. 12-B(2) the amount of capital gains has to be
computed after making certain deductions from the ’full
value’ of the consideration for which the sale is made. In
the case of a sale for a price, there is no question of any
market value unlike in the case of an exchange. Therefore,
in cases of sales to which the first proviso to sub-s.(2) of
s. 12-B is not attracted all that has to be seen is the
consideration bargained for. On the facts of the present
case the first proviso was not attracted. The price bar-
gained for the sale of the shares and securities was only
rupees seventy-five lakhs. The High Court rightly held that
the capital gains amounted to Rs. 274,772. [450 C]
Commissioner of Income-tax, West Bengal and Anr. v. George
Henderson and Co. Ltd., 66 I.T.R. 622, followed.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1452 &
1502 of 1969.
Appeals by certificate from the judgment and order dated
September 13, 1968 of the Calcutta High Court in Income-tax
Reference No. 101 of 1966.
S. C. Manchanda, B. B. Ahuja, S. P. Nayar and R. N. Sach-
they, for the appellants (in C. A. No. 1452/69 and for
respondent (in C. A. No. 1502/69).
D. Pal, T. A. Ramachandran and D. N. Gupta, for the
respondent (in C. A. No. 1452/69) and the appellant (in C.
A. No. 1502/69).
The Judgment of the Court was delivered by
HEGDE, J. These are cross-appeals by certificate. They
arise from the decision of the Calcutta High Court in a
Reference under s. 66(1) of the Indian Income-tax Act, 1922
(to be hereinafter referred to as the Act). At the instance
of the assessee as well as the Commissioner, the Income-tax
Tribunal ’B’ Bench, Calcutta stated a case and submitted as
many as five questions to the High Court for obtaining its
opinion. Some of the questions referred to the High Court
have not been passed before this Court. Therefore we shall
not refer to them. The questions that were pressed before
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us are :
"(1) Whether on the facts and in the
circumstances of the case, the Tribunal was
right in holding that the proceedings under
section 34 (1 )(a) have been validly initiated
?
(2) Whether on the facts and in the
circumstances of the case, any capital gains
within the meaning of Section 12-B could be
said to arise by the transaction involving
transfer of the invest-
440
ments held by the assessee to the Company,
admission of the Company as a partner in the
assessee firm and issue of shares of the Com-
pany to the public; and
(3) Whether on the facts and in the
circumstances of the case, the Tribunal was
justified in law in computing the capital
gains at Rs. 46,76,784/-?"
The High Court answered the first question in the
affirmative and in favour of the Revenue. So far as the
second question is concerned, it split the same into two
questions viz. whether on the facts and in the circumstances
of the case any capital gains within the meaning of s. 12-B
could be said to arise by the transaction involving transfer
of investments held by the assessee to the Company and
whether on the facts and in the circumstances of the case
any capital gains within the meaning of s. 12-B could be
said to arise by the admission of the Company as a partner
in the assessee firm and issue of shares of the Company to
the public ? It answered the first part of the question in
the affirmative and in favour of the Revenue and the second
part in the negative and against the Revenue. As regards
the 3rd question, the High Court opined that on the facts
and in the circumstances of the case, the capital gains
should have been computed at Rs. 27,04,772/-. Aggrieved by
this decision the Commissioner of Income-tax has brought
Civil Appeal No. 1452 of 1969 and the assessee has brought
Civil Appeal No. 1502 of 1969.
The only contentions urged in the assessee’s appeal were
that ,on the facts and in the circumstances of the case
proceedings under s. 34 (1) (a) have not been validly
initiated and to the facts of this case s. 12-B is not
attracted. In the appeal by the Commissioner, the question
for decision is what is the correct amount that has to be
brought to tax under S. 12-B as capital gains. The Counsel
for the Revenue did not contest the conclusion of the High
Court that on the facts and in the circumstances of the
case, no capital gains within the meaning of S. 12-B could
be said to have arisen by the admission of the Company as a
partner of the assessee company and issue of shares of the
Company to the public. Hence all that we have to decide in
these cases is (1) whether the proceedings initiated under
S. 34 (1) (a) are valid, (2) Whether S. 12-B is attracted to
the facts of the case and (3) If S. 12-B is attracted what
is the amount of the ,capital gains made ?
For pronouncing on the questions above-formulated, it is
necessary to set out the material facts. The assessee is a
registered firm which was carrying on business mostly as
managing agents of number of companies. Till the end of
February 1947,
441
the firm consisted of four partners namely (1) A.C.
Gladstone; (2) S. D. Gladstone; (3) T. S. Gladstone and (4)
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Glendye Limited., each of them having, 30%, 39%, 30% and 1%
shares respectively in the profits of the firm. We are
concerned with the assessment of the assessee firm for the
assessment year 1947-48 for which the previous year was the
financial year ended on March 31, 1947.
On February 28, 1947, the assessee firm through its partners
entered into an "agreement for sale" of some of the shares
and securities hold by it in favour of Gillanders Arbuthnot
& Co. (to be hereinafter referred to as the "Company") for a
sum of Rs. 75 lakhs. The shares and securties sold under
the document are enumerated at the foot of the document.
Clause (2) of that agreement provides :
"In consideration of the sum of Rupees
Fourteen Lakhs and Ninety thousand the
existing partners shall admit the company as a
partner in the firm upon and subject to the
partnership deed (a draft whereof has been
already approved by the existing partners and
the company), the share of the company in the
goodwill and in the profits of the Finn being
ninety-nine per cent thereof."
The only other clause which is relevant for
our present purpose is clause (3) which reads
:
"The said two sums of Rupees Seventy-five
lakhs and Rupees Fourteen lakhs and Ninety
thousand payable in accordance with Clauses 1
and 2 hereof shall be paid and satisfied as
follows
(a) As to the sum of Rupees Sixty-four lakhs
and Ninety thousand by an allotment to the
existing partners or their nominees of
sixty-four thousand and nine hundred Ordinary
Shares of rupees One hundred each credited for
all purposes as fully paid up.
(b) As to the sum of Rupees Twenty-five
lakhs by an allotment to the existing partners
or their nominees of Twenty-five thousand
Redeemable Cumulative Preference Shares of
Rupees One hundred each credited for all
purposes as fully paid up."
One other document that came into existence on the same Jay
viz. Feb. 28, 1947 is the deed of partnership. That day
the assessee firm was reconstituted and a new partnership
came into existence. The new partnership consisted of five
partners viz. (1) The "company"; (2) A. C. Gladstone; (3) S.
D. Gladstone
442
(4) T. S. Gladstone and (5) Glendy Limited. In this new
partnership the "Company" had 99 per cent share in its
profits. The remaining four, partners had only 1/4th per
cent share each in the profits of the new partnership.
Before proceeding further, it is necessary to mention that
the "Company", was previously a private Ltd. Company. In
1946 the "Company" applied to the Examiner of Capital Issues
for permission to convert itself into a Public Ltd. Company
and sell its shares at a premium. Originally the proposal
of the "Company" was to sell its shares of the face value of
Rs. 100/- to the public at a premium of Rs. 145 to Rs. 175/-
and its preferential share of the face value of Rs. 100/- at
a premium of Re. 1 to 5. The Examiner of Capital Issues did
not agree to that proposal. Later on after further
correspondence, the Examiner of Capital Issues permitted the
"Company" to convert itself into a Public Company and offer
its ordinary shares of the face value of Rs. 100/"- to the
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public at a premium not exceeding Rs. 125/- per share and
25,000/- Redeemable Cumulative Preference Shares of the face
value of Rs. 100 each ,it a premium -not exceeding Rs. 51-
per share.
We have earlier noticed that a substantial number of
ordinary as well as the preference shares were transferred
to the assessee firm at its face value.
The, original assessment of the assessee firm for the
assessment year 1947-48 was made on August 28, 1948 on a
total income of Rs. 12,90,829/- Thereafter the Income-tax
Officer initiated proceedings under s. 34 (1) (a) on May 2,
1949 and completed the fresh assessment on January 16, 1956
bringing to charge capital gains determined at Rs.
1,03,16,786/-. The assessee appealed to the Appellate
Assistant Commissioner. It raised various contentions
before the Appellate Assistant Commissioner. It is not
necessary to refer to those contentions. Suffice it to say
for our present purpose that it challenged the validity of
the initiation of the proceedings under s.34(1) (a) and
further it contended that there was no capital gain at all.
On the other hand it claimed that it incurred certain
capital loss. The Appellate Assistant Commissioner rejected
the contention of the assessee that the proceedings under S.
34 (1) (a) were not validly initiated. He came to the
conclusion that there were capital gains but he computed the
same at Rs. 70,9.124/-. On further appeal by the assessee
the Tribunal came to the conclusion that the capital gains
made by the assessee were only ,Rs. 46,76,784/-. In the
Reference mentioned earlier, the High Court came to the
Conclusion that the capital gains made by the assessee were
Rs. 27,04,772/-.
443
The first question that arises for decision is whether s.
34(1) (a) proceedings were validly initiated by the Income-
tax Officer. That provision says :
"If the Income-tax Officer has reason to
believe that by reason of the omission or
failure on the part of an assessee to make a
return of his income under section 22 for any
year or to disclose fully and truly all
material facts necessary for his assessment
for that year, income, profits or gains
chargeable to income-tax have escaped
assessment for that year or have been under-
assessed, or assessed at too low a rate, or
have been made the subject of excessive relief
under the Act, or excessive loss or
depreciation allowance has been
computed..........
In the present case all that we have to see is whether the
In come-tax Officer had reason to believe that the assessee
had not disclosed fully and truly all the material facts
necessary for its assessment for the assessment year in
question. The scope of the expression "failure on the part
of the assessee........ to disclose fully and truly all
material facts necessary for his assessment has been
examined by this Court in several decisions.
The leading case on the subject is Calcutta Discount Co.
Ltd. v. Income-tax Officer, Companies District-1, Calcutta
and anr.(1) Therein this Court by majority held that to
confer jurisdiction under s. 34 to issue notice in respect
of an assessment beyond a period of four years, but within a
period of eight years, from the end of the relevant year,
two conditions have to be satisfied. The first is that the
Income-tax Officer must have reason to believe that the
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income, profits or gains chargeable to income-tax had been
under-assessed; the second is that he must have reason to
believe that such "under-assessment" had occurred by reason
to either (1) omission or failure on the part of the
assessee to make a return of his income under s. 22 or (2)
comission or failure on the part of the assessee to disclose
fully and’ truly all material facts necessary for his
assessment for that year. Both these conditions are
conditions precedent to be satisfied before the Income-tax
Officer gets jurisdiction to issue a notice for the
assessment or reassessment beyond a period of four years but
within a period of eight years from the end of the year in
question. This Court further ruled therein that the words
"omission or failure to disclose fully and truly all
material facts necessary for his assessment for that year"
used in s. 34 postulate a duty on every assessee to disclose
fully and truly all material facts necessary for his
assessment. What facts are material and neces-
(1) 41 I.T.R. 191.
-L498SupCI/73
444
sary for assessment differs from case. In every assessment
proceeding, the assessing authority would for the purpose of
computing and determining proper tax due from an assessee,
require to know all the facts which help him in coming to
the correct conclusion. From the primary facts in his
possession whether on disclosure by the assessee or
discovered by him on the basis of the facts disclosed or
otherwise, the assessing authority has to draw inferences as
regards certain other facts; and ultimately from the primary
facts and further facts inferred from them, the authority
has to draw the proper legal inferences and ascertain, on a
correct interpretation of the taxing enactment, the proper
tax leviable So far as the primary facts are concerned, it
is the assessee’s duty to disclose all of them-including
particular entries in the account-books, particular portions
of documents and documents and other evidence which could
have been discovered by the assessing authority from the
documents and other evidence ,disclosed. The duty, however,
does not extend beyond the full and truthful disclosure of
all primary facts. Once all the primary facts are before
the assessing authority, it is for him to decide what
inferences of facts could be reasonably drawn and what legal
inferences have ultimately to be drawn. It was not for
anybody ,else-far less the assessee-to tell the assessing
authority what inferences whether of facts or of law should
be drawn. If there are in fact some reasonable grounds for
the Income-tax Officer to believe that there had been any
non-disclosure as regards the primary facts which, could
have a material bearing on the question of under-assessment
that would be sufficient to give jurisdiction to the Income-
tax Officer to issue the notice under s. 34. Whether those
grounds were adequate or not for arriving at the ,conclusion
that there was a non-disclosure of material facts is not
open to the court’s investigation. In other words, all that
is necessary to give jurisdiction is that the Income-tax
Officer had when he assumed jurisdiction some prima facie
grounds for thinking that there had been some non-disclosure
of material facts.
The rule laid down in Calcutta Discount Co.’s case (supra)
was reiterated by this Court in Commissioner of Income-tax
West Bengal and anr. v. Hemchandra Kar and ors. (1). The
same view was again expressed by this Court in Commissioner
of Income-tax Gujarat v. Bhanji Lavji(2) as well as in
Commissioner of Income-tax Calcutta v. Burlop Dealers Ltd.
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(3)
Bearing in mind the rule laid down in these decisions now
let us proceed to examine the facts of this case to find out
whether the assessee had failed to disclose fully and truly
all material facts for his assessment for the assessment
year in question. In this
(1) 77 I.T.R. p. 1.
(2) 79 I.T R. 583.
(3) 69 I.T.R. 609.
445
case we are dealing with capita gains. Hence the material
facts that had to be disclosed were those bearing on capital
gains. Though at the time of the original assessment of the
assessee, the partnership deed entered into by the five
partners was before the Income-tax Officer, the sale deed
executed by the partners of the assessee firm in favour of
the "Company" on February 28, 1947 had not been placed
before him. There was no material before the Income-tax
Officer on the basis of which he could have concluded that
the assessee firm had sold any shares and securities to the
"Company"; nor was there any material before the Income-tax
Officer as to the value of those shares and securities as on
January 1, 1939. Further no material was placed before him
to show that those shares and securities had been sold to
the "Company" for a sum of Rupees 75 lakhs. In fact the
assessee submitted its return for the assessment year in
question in an old form which did not contain Pt. VII which
dealt with particulars of income from capital gains. The
statement enclosed also did not contain specific particulars
about consideration for the sale of goodwill or for the sale
of shares of the "Company". It is not without significance
that the assessee did not challenge the validity of the
proceedings under s. 34 ( 1) (a) before the Income-tax
Officer. Even before the Appellate Assistant Commissioner,
the only point that appears to have been urged was that
since the firm was reconstituted and the reconstituted firm
was granted registration under s. 26-A in the assessment
year 1947-48, it should be presumed that the Income-tax
Officer while making the original assessment was aware of
all the material facts. We agree with the Tribunal and the
High Court that there is hardly any doubt that the assessee
had failed to disclose fully and truly all material facts
for the purpose of ascertaining whether it had made any
capital gains or not.
This takes us to the question whether the assessee had made
any capital gains in the relevant accounting year, if so,
what is the extent of its capital gains. The provision
relating to capital gains is found in s. 12-B. We shall now
read the relevant portion of that provision.
"S. 12-B(1). The tax shall be payable by an
assessee under the head "Capital Gains" in
respect of any profits or gains arising from
the sale, exchange, relinquishment or transfer
of a capital asset effected after the 31st day
of March, 1956, and such profits and gains
shall be deemed to be income of the previous
year in which the sale, exchange,
relinquishment or transfer took place".
[The provisos to sub-s. (1) are not relevant
for our present purpose].
446
Sub-1. (2) of S. 12-B says :
"The amount of a capital gain shall be
computed after making the following deductions
from the full value of the consideration for
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which the sale, exchange, relinquishment or
transfer of the capital asset is made namely :
(i) expenditure incurred solely in
connection with such sale, exchange,
relinquishment or transfer
(ii) the actual cost to the assessee of the
capital asset, including any expenditure of a
capital nature incurred and borne, by him in
making any additions or alterations thereto,
but excluding any expenditure in respect of
which any allowance is admissible under any
provision of sections 8, 9, 10 and 12;
Provided that where a person who acquires a
capital asset from the assessee, whether by
sale, exchange, relinquishment or transfer is
a person with whom the assessee is directly or
indirectly connected and the Income-tax
Officer has reason to believe that the sale,
exchange, relinquishment or transfer was
effected with the object of avoidance or
reduction of the liability of the assessee
under this section, the full value of the
consideration for which the sale, exchange,
relinquishment or transfer is made shall, with
the prior approval of the Inspecting Assistant
Commissioner of Income-tax be taken to be the
fair market value of the capital asset on the
date on which the sale, exchange, relin-
quishment or transfer took place."
(The remaining portion of s. 12-B is not relevant for our
present purpose).
The Income-tax Officer opined that the market value of the
shares and securities sold was much more than Rs. 75 lakhs.
Admittedly their original cost on January 1, 1939 was Rs.
47,95,728/Hence according to him, the "Company" secured
those shares and securities at below market value. The
Income-tax Officer further observed that the partners of the
assessee firm were the sole partners of the "Company" and
further held that the sale had been effected at a lower
price with the object of reducing the liability to capital
gains tax. On the basis of the Income-tax Officer’s
computation, the capital gains on the sale of the
investments were Rs. 75,86,960/-. As regards the, goodwill
the Income-tax Officer valued the same as on January 1,
1939, at Rs. 87,56,200/and 99 per cent thereof would work
out to be Rs. 86,67,648/-.
447
The assessee received for goodwill the sum of Rs.
14,90,000/’ The Company took over 99 per cent of the capital
deficiency of the partners amounting to Rs. 19,98,849/- and
99 per cent thereof came to Rs. 19,78,861/-. The Income-tax
Officer estimated the value of 99 per cent of the goodwill
at Rs. 1,13,97,474/ involving capital gain of Rs.
27,29,826/-. Thus according to the Income-tax Officer the
total capital gains on account of transfer of shares and
securities and goodwill amounted to Rs. 1,3,16,786/-. As
seen earlier this amount was substantially reduced by the
Appellate Assistant Commissioner and again by the Tribunal
as well as by the High Court.
The first question for decision is whether the first proviso
to s. 12-B is attracted to the facts of the present
case. The sale with which we are concerned in this case took
place on February 28, 1947. Section 12-B was incorporated
into the Act with effect from April 1, 1947. That being so
at the time the sale transaction took place s. 12-B was not
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a part of the Act. Hence there is no basis for saying that
the "transfer was effected with the object of avoidance or
reduction of the liability of the assessee" see
Commissioner of Income-tax, West Bengal and anr. v. George
Henderson and Co. Ltd.(1). Hence the question for decision
is whether the facts of this case fall within the scope of
s. 12-B(1) read with sub-s. (2) of that section.
We have earlier seen that the Income-tax Officer in
computing the total capital gains had taken into
consideration the capital gains said to have been earned as
a result of the sale of the shares and securities as well as
the goodwill. The Appellate Assistant Commissioner in his
order did not say anything specific about any capital gains
earned as a result of the sale of the goodwill. The
Tribunal rejected the case of the Department that there were
any capital gains made as a result of the sale of goodwill.
It also rejected the claim of the assessee that there was
some capital loss as a result of the sale of goodwill. On
this point the High Court agreed with the conclusions
reached by the Tribunal. The conclusion of the High Court
on this point was not challenged before us either by the
Revenue or by the assessee. Therefore there is no need to
go into the same. Hence the only question remaining to be
considered is whether there were any capital gains made as a
result of the transfer of the shares and securities by the
assessee to the Company. If so what is that amount ?
The first question that we have to decide in this connection
is whether the transaction entered into under the agreement
for sale dated February 28, 1947 is a sale or exchange or
merely a readjustment. It was contended on behalf of the
Revenue that it
(1) 66 I.T.R. 622.
448
was in effect an exchange though in form it was a sale.
According to the assessee, it was a mere readjustment. The
Revenue did not contend before the Appellate Assistant
Commissioner or the Tribunal or even the High Court that the
said transaction was not a sale. It was for the first time
before this Court the contention was taken that it was not a
sale. The contention of the assessee that it was merely
readjustment had been rejected by the authorities under the
Act as well as by the High Court.
Properly understood the effect of the contention of the
Revenue as well as of the assessee is that in finding out
the true nature of a transaction, the court must take into
consideration the substance of the transaction and not the
legal effect of the agreement entered into a proposition
which receives some support from some of the decided cases.
In Sir Kikabhai Premchand v. Commissioner of Income-tax
(Central), Bombay(1), this Court observed that "it is well
recognised that in revenue cases regard must be had to the
substance of the transaction rather than to its mere form".
The observations of this Court in Sir Kikabhai Premchand’s
case (supra) were made the basis of the decision of the
Bombay High Court in Commissioner of Income-tax, Bombay City
v. Sir Home Mehta’s Executors 2
In Rogers & Co. v. Commissioner of Income-tax, Bombay City-
11(3), High Court of Bombay ruled that the transfer of the
assets of the firm to the company was substantially and
really merely a readjustment made by the. members to enable
them to carry on their business as a company rather than as
a firm and no profits in the commercial sense were made
thereby; the transfer of the assets of the firm to the
company was, therefore, not a sale.
The same view was taken by the Calcutta High Court in
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Commissioner of Income-tax (Central), Calcutta v. Mugneeram
Bangur and Company (4 ).
This Court in Commissioner of Income-tax, Gujarat v. B. M.
Kharwar(5) , held that the observations in Sir Kikabhai
Premchand’s case (supra) to the effect that in revenue cases
regard must be had to the substance of the transaction
rather than its mere form cannot be read as throwing any
doubt on the principle that the true legal relation arising
from a transaction alone determines the taxability of a
receipt arising from the transaction. The observation in
question was considered as casual and that the same was not
necessary for the purpose of the case. In Kharwar’s case
(supra), this Court also disapproved the decisions in Sir
Homi Mehta’s Executors’ case (supra), Rogers’ & Co’s case
(1) 24 I.T.R. 506. (2) 28 I.T.R. 928.
(3) 34 T.T.R. 336. (4) 47 I.T.R. 565.
(5) 72 I.T.R. 603.
449
(supra) and Mugneeram Bangur & Co’s case (supra). Therein
this Court ruled that it is now well settled that the taxing
authorities are not entitled, in determining whether a
receipt is liable to be taxed, to ignore the legal character
of the transaction which is the source of the receipt and to
proceed on what they regard as "the substance of the
matter". The taxing authority is entitled and is indeed
bound to determine the true legal relation resulting from a
transaction. if the parties have chosen to conceal by a
device the legislation, it is open to the taxing authority
to unravel the device and to determine the true character of
the relationship. But the legal effect of a transaction
cannot be displaced by probing into the "substance of the
transaction". This, principle applies alike to cases in
which the legal relation is recorded in a formal document
and to cases where it has to be gathered, from evidence-oral
and documentary-and conduct of the parties to the
transaction.
In the instant case, the Tribunal has held that the
"agreement for sale" entered between the assessee firm and
the "company" is a genuine transaction and the same
evidences a sale. This is essentially a finding of fact.
The High Court has affirmed that finding. In that view, we
are unable to accept the contention of the Revenue that the
transaction in question was an exchange and not a sale. We
are equally unable to accept the I contention of the
assessee that it was merely a readjustment.
Clause (1) of the agreement in specific terms says that "the
existing partner shall sell and the company shall purchase
the shares and securities for a sum of Rupees seventy five
lakhs." Clause (3) of that agreement merely provides a mode
of satisfaction of the sale price. The sale price fixed by
the parties for the shares and the securities sold is 75
lakhs and nothing more. It may be that because of the
allotment of the shares of the Company in satisfaction of
the sale price, the assessee firm got certain benefits but
that does not convert the sale into an exchange.
In Commissioner of Income-tax, Kerala v. R. R. Ramakrishna
Pillai(1), this Court distinguishing an exchange from a sale
observed that where the person carrying on the business
transfers the assets to a company in consideration, of
allotment of shares, it would be a case of exchange and not
of sale and the true nature of the transaction will not be
altered because for the purpose of stamp duty or other
reasons the value of the assets transferred is shown as
equivalent to the face value of the shares allotted. On the
other hand a person carrying on business may agree with a
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company floated by him that the assets belonging to him
shall be transferred to the company for a certain money
consideration and that in satisfaction of the liability to
pay the money consideration
(1) 66 I.T.R. 725.
450
shares of certain face value shall be allotted to the
transferor. In such a case there are in truth two
transactions, one transaction of sale and the other a
contract under which the shares are accepted in satisfaction
of the liability to pay the price. The fact that as a
result of the transfer of the shares of the "Company" to the
assessee firm, the latter obtained considerable profits,
will not alter the true nature of the transaction-see the
decision of this Court in Chittoor Motor Transport Co. (P)
Ltd. v. Income-tax Officer, Chittoor(1).
For the reasons above stated, we have no hesitation in
coming to the conclusion that the transaction evidenced by
the "agreement for sale" between the company and the
assessee was a sale.
Now let us see what is the impact of s. 12-B(2) on that
transaction ? Under that provision, the amount of capital
gains has to be computed after making certain deductions
from the full value of the consideration for which the sale
is made. What exactly is the meaning of the expression
"full value of the consideration for which sale is made"?
Is it the consideration agreed to be paid or is it the
market value of the consideration ? In the case of sale for
a price, there is no question of any market value unlike in
the case of an exchange. Therefore in cases of sales to
which the first proviso to sub-s. (2) of s. 12-B is not
attracted, all that we have to see is what is the
consideration bargained for. As mentioned earlier to the
facts of the present case, the first proviso is not
attracted. As seen earlier, the price bargained for the
sale of the shares and securities was only rupees seventy
five lakhs. The facts of this case squarely fall within the
rule laid down by this Court in Commissioner of Income-tax,
west Bengal and anr. v. George Henderson & Co. Ltd. (Supra).
Therein this Court observed :
"In a case of a sale, the full value of the
consideration is the full sale price actually
paid. The legislature had to use the words
"full value of the consideration" because it
was dealing not merely with sale but with
other types of transfer, such as exchange,
where the consideration would be other than
money. If it is therefore held in the present
case that the actual price received by the
respondent was at the rate of Rs. 136 per
share-the full value of the consideration must
be taken at the rate of Rs. 136 per share.
The view that we have expressed as to the
interpretation of the main part of section
12B(2) is borne out by the fact that in the
first proviso to section 12(B) (2), the
expression "full value of the consideration"
is used in contradistinc-
(1) 59 IT.R. 238.
tion with "fair market value of the capital
asset" and there is an express power granted
to the Income-tax Officer to "take the fair
market value of the capital asset transferred"
as "the full value of the consideration" in
specified circumstances. It is evident that
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the legislature itself has made a distinction
between the two expressions "full value of the
consideration" and "fair market value of the
capital asset transferred" and it is provided
that if certain conditions are satisfied as
mentioned in the first proviso to section
12B(2), the market value of the asset
transferred, though not equivalent to the full
value of the consideration for the transfer,
may be deemed to be the full value of the
consideration. To give rise to this fiction
the two conditions of the first proviso are
(1) that the transferor was directly or in-
directly connected with the transferee, and
(2) that the transfer was effected with the
object of avoidance or reduction of the
liability of the assessee under section 12B.
If the conditions of this proviso are not
satisfied the main part of section 12B(2)
applies and the Income-tax Officer must take
into account the full value of the
consideration for the transfer."
It may be noted that in that case the market value of the
shares which were allotted at Rs. 136/- per share was Rs.
620/per share.
Applying the principles enunciated in that decision we think
that the full value of the sale price received by the
assessee was only rupees seventy five lakhs. That being so,
the capital gains made by the company were Rs. 27,4 772/- as
held by the High Court.
In the result both these appeals fail and they are dismissed
with costs.
K.B.N. Appeals dismissed.
452