Business restructuring transfer not treated as taxable sale where same members continued the enterprise through a new company.

A transfer of buses by an association of persons to a newly formed private limited company, owned entirely by the same members, was treated as a mere readjustment of business structure rather than a commercial sale for tax purposes. Although the company was a separate legal entity and the transfer was a sale in the strict legal sense, the taxing provision required a real vendor-vendee transaction. As the same persons continued the same business through another form, the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922 did not apply, and the amount was not assessable under that provision.

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Issues: Whether the transfer of buses by an association of persons to a newly formed private limited company, in which the same members held the entire interest, constituted a sale attracting the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: Although the transfer was a sale in the strict legal sense because the company was a separate legal entity, the material inquiry under the taxing provision was the real nature of the transaction. The transfer was a mere readjustment of business structure, with the same persons continuing the same business through another form. In such circumstances, there was no sale in the commercial sense contemplated by the proviso, and the provision was intended to tax profits arising from a real vendor-vendee transaction.

Conclusion: The question was answered in the negative. The amount was not assessable under the second proviso to Section 10(2)(vii), and the decision was against the department and in favour of the assessee.

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