Separate legal entity principle governs tax on transfers to a wholly owned subsidiary, including surplus and written down value gains.

A transfer of leasehold mineral rights from a parent company to its wholly owned subsidiary was treated as a transfer between distinct legal persons, so the surplus was taxable despite the business-readjustment character of the arrangement. The court applied the strict legal form and effect of the transaction, not the economic unity of the group, and held the surplus on transfer of mining rights taxable against the assessee. The same approach applied to plant, machinery and buildings transferred to the subsidiary: excess realised over written down value was assessable, and indirect control through shareholding did not defeat the tax consequence. Both questions were answered against the assessee.

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Issues: (i) Whether taxable profit arose on the transfer or sub-lease of leasehold mineral rights to a 100% subsidiary company under section 10 of the Indian Income-tax Act, 1922; (ii) Whether the excess realised over the written down value of plant, machinery and buildings transferred to the subsidiary company was assessable under section 10(2)(vii) of the Indian Income-tax Act, 1922.

Issue (i): Whether taxable profit arose on the transfer or sub-lease of leasehold mineral rights to a 100% subsidiary company under section 10 of the Indian Income-tax Act, 1922.

Analysis: The assessee and its wholly owned subsidiary were distinct legal entities. The transfer of mining rights was for valuable consideration and constituted a sale to another legal person. The tax liability had to be determined according to the strict legal form of the transaction, and the arrangement for business readjustment did not alter the taxable character of the transfer.

Conclusion: No. The surplus on transfer of the mining rights was taxable and the finding was against the assessee.

Issue (ii): Whether the excess realised over the written down value of plant, machinery and buildings transferred to the subsidiary company was assessable under section 10(2)(vii) of the Indian Income-tax Act, 1922.

Analysis: The transfer of plant, machinery and buildings to the subsidiary was likewise a transfer between separate legal entities for consideration. The principle applied was that tax consequences follow the legal effect of the transaction, and the substitution of shareholding or indirect control could not avoid liability arising from excess realisation over written down value.

Conclusion: Yes. The excess was assessable and the finding was against the assessee.

Final Conclusion: Both referred questions were answered against the assessee, and the tax treatment adopted by the revenue was upheld.

Ratio Decidendi: Where a parent company transfers assets or rights to its wholly owned subsidiary for consideration, the companies remain separate legal entities and taxation is governed by the strict legal form and legal effect of the transfer, not by the economic unity of their business interests.

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