Commercial substance over form: intra-group asset transfer in a business reorganisation was not treated as a taxable sale.

The article explains that, in taxing statutes, the term "sale" is construed by its real commercial substance rather than its formal legal shape. A transfer of assets by a firm to a newly formed private company with the same persons behind both entities was treated as a restructuring of the same business ownership, not a genuine commercial sale. Because the transaction was a readjustment of ownership and not a profit-making sale to a third party, the second proviso to section 10(2)(vii) of the Income-tax Act, 1922 did not apply, and the excess over written-down value was not taxable under that provision.

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Issues: Whether, on the facts and circumstances of the case, the transfer of assets by a firm to a newly formed private limited company constituted a sale so as to attract the second proviso to section 10(2)(vii) of the Income-tax Act, 1922, and render the excess over written-down value taxable.

Analysis: The firm and the company were distinct legal entities, but the persons behind both entities were identical and continued the same business in altered legal form. For taxing purposes, the real nature of the transaction had to be examined, not merely its legal form. The transfer was found to be a readjustment of the same business ownership structure, not a commercial sale entered into to earn profit. A sale under the proviso required a real transfer involving profit-making in substance, and a person could not, in the relevant sense, make profit by transferring assets to himself. The principle earlier applied to similar reorganisations was held to govern the present case as well.

Conclusion: The transfer was not a sale within the meaning of the second proviso to section 10(2)(vii) of the Income-tax Act, 1922, and the amount of Rs. 1,03,506 was not taxable under that provision.

Ratio Decidendi: In taxing statutes, the word "sale" must be construed according to the real and commercial substance of the transaction; a mere restructuring or readjustment of ownership without a genuine commercial sale does not attract the charging consequence of a provision directed at profit arising from sale.

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