TaxTMI 
TaxTMI 
1972 (9) TMI 13
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...., on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under section 34(1)(a) have been validly initiated ? (2) Whether, on the facts and in the circumstances of the case, any capital gains within the meaning of section 12B could be said to arise by the transaction involving transfer of the investments held by the assessee to the company, admission of the company as a partner in the assessee-firm and issue of shares of the company to the public ? and (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in computing the capital gains at Rs. 46,76,784? " The High Court answered the first question in the affirmative and in favour of the revenue. So far as the second question is concerned, it split the same into two questions, viz., whether, on the facts and in the circumstances of the case, any capital gains within the meaning of section 12B could be said to arise by the transaction involving transfer of investments held by the assessee to the company and whether, on the facts and in the circumstances of the case, any capital gains within the meaning of section 12B could be said to ....
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....by it in favour of Gillanders Arbuthnot & Co. (to be hereinafter referred to as " the company ") for a sum of Rs. 75 lakhs. The shares and securities sold under the document are enumerated at the foot of the document. Clause (2) of that agreement provides : " In consideration of the sum of Rupees fourteen lakhs and ninety thousand the existing partners shall admit the company as a partner in the firm upon and subject to the partnership deed (a draft whereof has been already approved by the existing partners and the company), the share of the company in the goodwill and in the profits of the firm being ninety-nine per cent. thereof. The only other clause which is relevant for our present purpose is clause (3), which reads : " The said two sums of Rupees seventy-five lakhs and Rupees fourteen lakhs and ninety thousand payable in accordance with clauses 1 and 2 hereof shall be paid and satisfied as follows : (a) As to the sum of Rupees sixty-four lakhs and ninety thousand by an allotment to the existing partners or their nominees of sixty-four thousand and nine hundred ordinary shares of rupees one hundred each credited for all purposes as fully paid up. (b) As to the sum of....
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....y to refer to those contentions. Suffice it to say for our present purpose that it challenged the validity of the initiation of the proceedings under section 34(1)(a) and further it contended that there was no capital gain at all. On the other hand, it claimed that it incurred certain capital loss. The Appellate Assistant Commissioner rejected the contention of the assessee that the proceedings under section 34(1)(a) were not validly initiated. He came to the conclusion that there were capital gains but he computed the same at Rs. 70,09,124. On further appeal by the assessee the Tribunal came to the conclusion that the capital gains made by the assessee were only Rs. 46,76,784. In the reference, as mentioned earlier, the High Court came to the conclusion that the capital gains made by the assessee were Rs. 27,04,772. The first question that arises for decision is whether section 34(1)(a) proceedings were validly initiated by the Income-tax Officer. That provision says : " If the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly ....
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....for the purpose of computing and determining proper tax due from an assessee, require to know all the facts which help him in coming to the correct conclusion. From the primary facts in his possession, whether on disclosure by the assessee or discovered by him on the basis of the facts disclosed or otherwise, the assessing authority has to draw inferences as regards certain other facts ; and ultimately from the primary facts and further facts inferred from them, the authority has to draw the proper legal inferences and ascertain, on a correct interpretation of the taxing enactment, the proper tax leviable. So far as the primary facts are concerned, it is the assessee's duty to disclose all of them including particular entries in the account-books, particular portions of documents and documents and other evidence which could have been dis- covered by the assessing authority from the documents and other evidence disclosed. The duty, however, does not extend beyond the full and truthful disclosure of all primary facts. Once all the primary facts are before the assessing authority, it is for him to decide what inferences of facts could be reasonably drawn and what legal inferences have....
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....form which did not contain Part VII which dealt with particulars of income from capital gains. The statement enclosed also did not contain specific particulars about consideration for the sale of goodwill or for the sale of shares of the " company ". It is not without significance that the assessee did not challenge the validity of the proceedings under section 34(1)(a) before the income-tax Officer. Even before the Appellate Assistant Commissioner, the only point that appears to have been urged was that since the firm was reconstituted and the reconstituted firm was granted registration under section 26A in the assessment year 1947-48, it should be presumed that the Income-tax Officer while making the original assessment was aware of all the material facts. We agree with the Tribunal and the High Court that there is hardly any doubt that the assessee had failed to disclose fully and truly all material facts for the purpose of ascertaining whether it had made any capital gains or not. This takes us to the question whether the assessee had made any capital gains in the relevant accounting year, if so, what is the extent of its capital gains. The provision relating to capital gains....
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....rs of the assessee-firm were the sole partners of the " company " and further held that the sale had been effected at a lower price with the object of reducing the liability to capital gains tax. On the basis of the Income-tax Officer's computation, the capital gains on the sale of the investments were Rs. 75,86,960. As regards the goodwill, the Income-tax Officer valued the same as on January 1, 1939, at Rs. 87,56,200 and 99 per cent. thereof would work out to be Rs. 86,67,648. The assessee received for goodwill the sum of Rs. 14,90,000. The company took over 99 per cent. of the capital deficiency of the partners amounting to Rs. 19,98,849 and 99 per cent. thereof came to Rs. 19,78,861. The Income-tax Officer estimated the value of 99 per cent. of the goodwill at Rs. 1,13,97,474 involving capital gain of Rs. 27,29,826. Thus, according to the Income-tax Officer, the total capital gains on account of transfer of shares and securities and goodwill amounted to Rs. 13,16,786. As seen earlier this amount was substantially reduced by the Appellate Assistant Commissioner and again by the Tribunal as well as by the High Court. The first question for decision is whether the first proviso ....
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....e assessee that it was merely a readjustment had been rejected by the authorities under the Act as well as by the High Court. Properly understood, the effect of the contention of the revenue as well as of the assessee is that in finding out the true nature of a transaction, the court must take into consideration the substance of the transaction and not the legal effect of the agreement entered into---a proposition which receives some support from some of the decided cases. In Sir Kikabhai Premchand v. Commissioner of Income-tax this court observed that " it is well recognised that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. " The observations of this court in Sir Kikabhai Premchand's case were made the basis of the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Homi Mehta's Executors . In Rogers & Co. v. Commissioner of Income-tax the High Court of Bombay ruled that the transfer of the assets of the firm to the company was substantially and really merely a readjustment made by the members to enable them to carry on their business as a company rather than as a firm and no profits in the commercia....
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....t in specific terms says that " the existing partner shall sell and the company shall purchase the shares and securities for a sum of rupees seventy-five lakhs ". Clause (3) of that agreement merely provides a mode of satisfaction of the sale price. The sale price fixed by the parties for the shares and the securities sold is Rs. 75 lakhs and nothing more. It may be that because of the allotment of the shares of the company in satisfaction of the sale price, the assessee-firm got certain benefits but that does not convert the sale into an exchange. In Commissioner of Income-tax v. R. R. Ramakrishna Pillai this court, distinguishing an exchange from a sale observed that where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange and not of sale and the true nature of the transaction will not be altered because for the purpose of stamp duty or other reasons the value of the assets transferred is shown as equivalent to the face value of the shares allotted. On the other hand, a person carrying on business may agree with a company floated by him that the assets belonging to him shall be transferre....