1958 (3) TMI 61 - HC - Income Tax

Transfer of assets between related entities not taxable; court directs Commissioner to cover costs and allow assessment corrections.

ROGERS & CO. Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY II

ROGERS & CO. Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY II - [1958] 34 ITR 336 (Bom) Issues Involved:1. Whether the transfer of assets from the firm to the private limited company constitutes a sale.2. Whether the sum of Rs. 1,03,506 is assessable to tax under the second proviso to section 10(2)(vii) of the Income-tax Act.Detailed Analysis:1. Whether the transfer of assets from the firm to the private limited company constitutes a sale:The key issue is whether the transfer of assets from the firm to the private limited company can be considered a sale for the purposes of taxation under section 10(2)(vii) of the Income-tax Act. The firm, consisting of eleven partners, converted itself into a private limited company on August 6, 1949. The shareholders of the company were the same individuals as the partners of the firm, with shares allotted in the same proportions, rounded off to specific numbers. The written-down value of the block assets in the firm's books was Rs. 3,81,848, and these were transferred to the limited company at the original cost price of Rs. 4,85,354.The court emphasized that while legally the partnership firm and the private limited company are distinct entities, the individuals constituting these entities are identical. The court noted that the persons who benefit from the profits of the firm and the company are the same, sharing profits in the same proportion. The court stated that in taxation matters, the real nature of the transaction should be considered rather than its legal form. The court concluded that the transfer was not a sale in the commercial sense but a readjustment of the business structure, where the same individuals continued the same business activity through a different legal entity.2. Whether the sum of Rs. 1,03,506 is assessable to tax under the second proviso to section 10(2)(vii) of the Income-tax Act:Section 10(2)(vii) deals with depreciation, and its second proviso states that if the sale price of any building, machinery, or plant exceeds the written-down value, the excess amount, up to the difference between the original cost and the written-down value, shall be deemed as profits of the previous year in which the sale took place. The Income-tax Officer added the difference of Rs. 1,03,506 (Rs. 4,85,354 - Rs. 3,81,848) to the appellant's income for the assessment year 1950-51 under this proviso.The court referred to the case of Commissioner of Income-tax v. Sir Homi Mehta's Executors, where it was held that a transfer of shares to a private limited company formed by the same individuals was not a sale but a readjustment of their position as shareholders. Applying this principle, the court held that the transfer of assets from the firm to the company was not a sale but a readjustment for carrying on the business in a different form. Therefore, the second proviso to section 10(2)(vii) was not attracted, and the sum of Rs. 1,03,506 was not assessable to tax.The court also noted that if the transaction is not considered a sale for tax purposes, the book entry showing the value of assets as Rs. 4,85,354 cannot be used to claim depreciation. The written-down value of the assets remains Rs. 3,81,848 for both the firm and the company.Conclusion:The court answered the question of law in the negative, stating that the sum of Rs. 1,03,506 is not assessable to tax under the second proviso to section 10(2)(vii) of the Income-tax Act. The Commissioner was ordered to pay the costs. The court also acknowledged that the Department could take necessary proceedings to correct the assessment of the assessee company under the appropriate provisions of the Act.