Sale of business assets to a private company treated as taxable sale despite share allotment used to discharge consideration.

Transfer of business assets to a private limited company for a stated money consideration was treated as a sale for tax purposes, even though the consideration was later satisfied by allotment of shares to the transferor and his relations. The court treated the arrangement as two distinct steps: a sale of the assets for price and a separate mode of discharging that price. Because the company was a separate legal entity, the taxing authority had to give effect to the legal character of the document and not reclassify the transaction as a mere exchange. The excess over written down value was therefore taxable as profit under the second proviso to section 10(2)(vii).

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Issues: Whether the transfer of the business assets to the private limited company amounted to a sale attracting the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, so that the excess over written down value was taxable as profit.

Analysis: The deed of assignment showed a transfer of the assets for a money consideration of Rs. 5 lakhs. The circumstance that the consideration was adjusted by allotment of shares to the transferor and his relations did not alter the legal character of the transaction. The arrangement was treated as involving two distinct steps: a sale of the assets for price, and a separate satisfaction of that price by share allotment. The company was a separate legal entity, and the taxing authorities were bound to determine the true legal relation arising from the document rather than disregard it on a supposed substance-of-the-transaction approach. The contention that the transaction was merely an exchange was rejected.

Conclusion: The transaction was a sale within section 10(2)(vii), and the excess over written down value was rightly brought to tax; the question was answered in the affirmative, against the assessee and in favour of the revenue.

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