Corporate personality and shares as money's worth sustained tax on asset transfer gains

A transfer of business assets to a duly incorporated private company was treated as a sale to a separate juristic person, because controlling shareholding alone did not justify disregarding corporate personality. The recognised exceptions for piercing the corporate veil were held inapplicable on the stated facts. Fully paid shares received as consideration were treated as money's worth, since taxable profit may be realised in kind as well as in cash. On that basis, the excess of sale consideration over written down value was brought to tax under the relevant proviso.

---

---

Issues: (i) Whether the transfer of the business assets to the private limited company was a genuine sale notwithstanding the assessee's controlling shareholding; (ii) whether fully paid shares received as consideration constituted sale proceeds or money's worth so as to attract tax on the excess over written down value.

Issue (i): Whether the transfer of the business assets to the private limited company was a genuine sale notwithstanding the assessee's controlling shareholding.

Analysis: A company incorporated under law is a separate juristic person distinct from its shareholders. The fact that one shareholder holds substantially all the shares does not, by itself, justify ignoring corporate personality. The recognised exceptions for looking beyond the corporate form did not apply on the facts. The transaction was therefore treated as one between two separate legal entities.

Conclusion: The transfer was a sale between the assessee and the company and could not be disregarded on the footing that the assessee and the company were the same person.

Issue (ii): Whether fully paid shares received as consideration constituted sale proceeds or money's worth so as to attract tax on the excess over written down value.

Analysis: Income and profits may be realised not only in cash but also in kind or in an equivalent of cash. Fully paid shares have ascertainable money value and may represent realisation of trading or capital profit for tax purposes. The exchange of assets for shares therefore did not prevent the receipt from being treated as sale proceeds for computation under the taxing provision.

Conclusion: The fully paid shares were money's worth and the excess of sale consideration over the written down value was rightly brought to tax under the proviso to section 10(2)(vii).

Final Conclusion: The reference was answered against the assessee, and the taxable addition based on the excess of sale proceeds over written down value was upheld.

Ratio Decidendi: A transfer to a duly incorporated company is a sale to a distinct legal person, and consideration received in fully paid shares is taxable as money's worth when it represents realised profit.

---