1962 (8) TMI 95 - HC - Income Tax

Court Taxes Excess Sale Proceeds as Income; Rejects Assessee's Arguments

Maharajadhiraj Sir Kameshwar Singh Versus Commissioner of Income-Tax, Bihar and Orissa

The court held that the excess amount of Rs. 1,30,785, from the sale proceeds of buildings, plant, and machinery, was rightly taxed as income under ... - Issues Involved:1. Whether the amount of Rs. 1,30,785, being the excess of sale proceeds of the buildings, plant, and machinery over the written down value, could be termed as income, profits, and gains of the petitioner under the Indian Income-tax Act.2. Whether the transaction between the assessee and the newly floated private limited company constituted a sale.3. Whether the receipt of fully paid-up shares instead of cash affects the applicability of the second proviso to section 10(2)(vii) of the Indian Income-tax Act.4. Whether the relevant accounting year was correctly determined.Issue-wise Detailed Analysis:1. Excess of Sale Proceeds as Income:The court held that the amount of Rs. 1,30,785, being the excess of sale proceeds over the written down value of the buildings, plant, and machinery, was rightly taxed as income in the hands of the assessee under section 10(2)(vii) of the Indian Income-tax Act. The assessee's argument that the transaction was not a sale because he owned practically all the shares of the company was rejected. The court emphasized that the company is a separate legal entity distinct from its members, capable of enjoying rights and being subjected to duties independently.2. Transaction as a Sale:The court rejected the assessee's argument that there was no sale as the company was not distinct from him. It cited several precedents, including Salomon v. Salomon & Co. [1897] A.C. 22, to affirm that a company is a separate legal entity. The court noted that the transaction involved a transfer of property from individuals to a corporation, which constituted a 'conveyance on sale' chargeable with an ad valorem duty, regardless of the fact that the individuals who conveyed the property were also the members of the corporation.3. Receipt of Fully Paid-up Shares:The court dismissed the argument that the receipt of fully paid-up shares instead of cash affected the applicability of the second proviso to section 10(2)(vii). It held that profits are realized when the seller gets the price he has bargained for, even if the price takes the form of shares. The court referred to Californian Copper Syndicate v. Harris [1904] 5 Tax Cas. 159 and Westminster Bank Ltd. v. Osler [1933] 1 I.T.R. 65 to support the view that income received in kind is equivalent to income received in cash for tax purposes.4. Relevant Accounting Year:The court found no merit in the assessee's argument that the relevant accounting year was not correctly determined. It noted that the assessee had admitted in his application under section 66(2) of the Indian Income-tax Act that the sale took place in the relevant accounting year, namely, 1356 Fasli. The court upheld the Income-tax Appellate Tribunal's observation that the accounting year of the transaction was the Fasli year 1356, from 19th September 1948 to 7th September 1949.Conclusion:The court concluded that the excess amount of Rs. 1,30,785 was rightly taxed as income under section 10(2)(vii) of the Indian Income-tax Act. The assessee's arguments were rejected, and the court reaffirmed the principle that a company is a separate legal entity distinct from its members. The court also held that the receipt of fully paid-up shares constitutes a realizable profit, and the relevant accounting year was correctly determined. The assessee was ordered to pay the costs of the reference, with a hearing fee of Rs. 250.