1963 (2) TMI 57 - HC - Income Tax

High Court deems Rs. 40,247 as profits under Income-tax Act

Commissioner Of Income-Tax Versus Associated Clothiers Ltd.

Commissioner Of Income-Tax Versus Associated Clothiers Ltd. - TMI Issues Involved:1. Whether the sum of Rs. 40,247 could be deemed to be profits of the assessee company under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act.2. Whether the transfer of property between two companies with identical shareholders and directors constitutes a sale from self to self.3. The applicability of the doctrine of lifting the corporate veil in this context.Detailed Analysis:1. Deemed Profits under Section 10(2)(vii) of the Indian Income-tax Act:The primary issue was whether the sum of Rs. 40,247 could be deemed as profits of the assessee company under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act. The proviso states that if the sale amount of a building exceeds its written down value, the excess amount, up to the difference between the original cost and the written down value, shall be deemed as profits. The assessee transferred a building to another company for Rs. 2,24,637, while the written down value was Rs. 57,011, resulting in a difference of Rs. 40,247. The Income-tax Officer and the Appellate Assistant Commissioner assessed this amount as deemed profits. The Tribunal initially excluded this amount from the total income, but the High Court ultimately ruled that the Tribunal was wrong, and the sum should be deemed as profits under the said proviso.2. Sale from Self to Self:The controversy centered on whether the transfer of property between two companies with identical shareholders and directors constitutes a sale from self to self. The assessee argued that since the shareholders and directors of both companies were the same, the transfer was essentially from self to self, and thus not a commercial sale yielding taxable profit. However, the High Court rejected this contention, emphasizing that a company is distinct from its shareholders and directors. The Court cited the principle from Salomon v. Salomon and Co., affirming that a company is a separate legal entity. Therefore, transactions between two separate companies, even with identical shareholders and directors, cannot be regarded as transactions from self to self.3. Doctrine of Lifting the Corporate Veil:The Court addressed the doctrine of lifting the corporate veil, which allows courts to look beyond the separate legal personality of a company in certain circumstances, such as fraud or where the company is a mere facade. The Court noted that this doctrine has limited application and is guarded by rules of caution. It emphasized that the doctrine is not intended to disregard the separate legal entities of companies unless there is evidence of fraud or the companies are being used as a facade. In this case, there was no allegation of fraud, and both companies were genuine entities doing business separately. The Court concluded that the doctrine of lifting the veil was not applicable, and the two companies could not be treated as the same entity for tax purposes.Conclusion:The High Court concluded that the Tribunal was wrong in excluding the sum of Rs. 40,247 from being deemed as profits of the assessee under the second proviso to Section 10(2)(vii) of the Income-tax Act. The Court held that the transfer between the two companies was a commercial sale and not a transaction from self to self. The doctrine of lifting the corporate veil was not applicable in this case, as there was no fraud or facade involved. The assessee was directed to bear the costs of the reference.