Deeming of capital gains applies where distinct companies transfer assets despite identical shareholders, making the excess taxable.

Whether an excess between sale price and written down value realised on transfer of a building between two limited companies with identical shareholders and directors falls within the deeming provision of the Income-tax Act is resolved by treating the companies as separate juristic persons; the corporate veil is not lifted absent fraud, agency, mere facade or statutory basis. Because the facts show distinct incorporated entities with recorded vendor-purchaser dealings and no reconstruction or amalgamation, the second proviso's deeming rule applies and the excess is taxable.

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Issues: Whether the excess (Rs. 40,247) between original cost and written down value realised on the transfer of a building is to be deemed profits under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1961 when the transfer was made from one limited company to another limited company having identical shareholders and directors.

Analysis: The provision deems so much of the excess of sale price over written down value not exceeding the difference between original cost and written down value to be profits of the previous year. The legal question is whether a transfer between two separate limited companies with the same shareholders and directors can be treated as a sale from self to self so as to avoid the deeming provision. The legal character of a limited company as a separate juristic entity from its shareholders and directors is firmly established and not lightly to be disregarded. Authorities permitting piercing of the corporate veil are of limited application and are confined to special circumstances such as fraud, statutory provisions, agency established in fact, or where a company is a mere facade. The present facts show two incorporated companies existing side by side for a prolonged period, expressed and recorded dealings treating them as vendor and purchaser, and instances where corporate personality was relied upon by the transferor company itself. The transfer is not a reconstruction or conversion of a partnership or individual into a company, nor a complete amalgamation; therefore the exceptional bases for lifting the veil do not apply.

Conclusion: The excess of Rs. 40,247 is to be deemed profits under the second proviso to Section 10(2)(vii) of the Income-tax Act, 1961 and the earlier exclusion of that sum was incorrect; the deeming provision applies and the amount is taxable.

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