1968 (9) TMI 49 - HC - Income Tax

Indian Court Decision on Capital Gains Assessment Pre-Independence: Section 12B(2) Not Applicable

Gillanders Arbuthnot And Co. Versus Commissioner Of Income-Tax, West Bengal III, Calcutta.

Gillanders Arbuthnot And Co. Versus Commissioner Of Income-Tax, West Bengal III, Calcutta. - [1970] 76 ITR 160 Issues Involved:1. Competence of the Government of India to reopen an assessment for capital gain prior to August 15, 1947.2. Applicability of the first proviso to section 12B(2) of the Indian Income-tax Act.3. Validity of proceedings initiated under section 34(1)(a).4. Determination of capital gains arising from the transfer of investment and admission of a company as a partner.5. Computation of capital gains.Issue-wise Detailed Analysis:Issue 1: Competence of the Government of India to Reopen Assessment for Capital Gain Prior to August 15, 1947The second question addressed whether the Government of India was competent to reopen an assessment for assessing capital gain and realizing the tax for gains arising before August 15, 1947. The Tribunal had overruled the point, and the court affirmed this decision, stating, 'Nothing has been urged before us for which we can take another view.' Thus, the court answered the question in the affirmative.Issue 2: Applicability of the First Proviso to Section 12B(2)The fourth question examined whether the first proviso to section 12B(2) was applicable. The court noted that the negotiation for the sale began in 1946, at a time when section 12B was not in the statute book. Citing a previous judgment, the court stated, 'The transfer was effected at a time when section 12B was not in the statute and, therefore, it could not possibly have been made with the object of avoidance or reduction of liability of the assessee under the said Act.' Consequently, the court answered this question in the affirmative.Issue 3: Validity of Proceedings Initiated Under Section 34(1)(a)The first question addressed the validity of the proceedings initiated under section 34(1)(a). The court discussed the amendments to section 34 in 1939 and 1948, referring to them as 'the old section 34' and 'the new section 34.' The court held that the notice issued on May 2, 1949, was valid under the new section 34, stating, 'The Income-tax Officer was authorised to issue a notice under section 34(1)(a) on May 2, 1949, in cases where the previous assessment was for the year 1947-48.' Thus, the court answered this question in the affirmative.Issue 4: Determination of Capital Gains Arising from Transfer of Investment and Admission of a Company as a PartnerThe third question dealt with whether any capital gains arose from the transaction involving the transfer of investment and the admission of the company as a partner. The court differentiated between the sale of shares and the admission of the company as a partner. It held that the sale of shares constituted a real sale, stating, 'The sale in question was a real sale because the real partners transferred to a juristic person, namely, the limited company.' However, the court found that the admission of the company as a partner did not constitute a sale of goodwill by the firm, stating, 'The firm retained the goodwill but the partners sold the shares less 1/4%. They are not the assessees.' Thus, the court answered the third question in the affirmative for the transfer of investments and in the negative for the admission of the company as a partner.Issue 5: Computation of Capital GainsThe fifth question addressed the computation of capital gains. The court held that the 'full value' of the shares should be considered as Rs. 75,00,000, stating, 'The 'full value' in the case of a sale means the price without any deduction.' The court concluded that the capital gain by the sale of securities was Rs. 27,04,272, and there was no capital gain concerning the goodwill. Thus, the court answered the fifth question in the negative, stating, 'The capital gain amounted to Rs. 27,04,272.'Final Judgment:- Question No. 1: Affirmative- Question No. 2: Affirmative- Question No. 3: Affirmative (for transfer of investments) and Negative (for admission of the company as a partner)- Question No. 4: Affirmative- Question No. 5: Negative (capital gain was Rs. 27,04,272)In view of the divided success, each party was ordered to bear its own costs.