TaxTMI 
TaxTMI 
1961 (12) TMI 93
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....., the central question being whether the partners of the firm made a profit in the transaction which is assessable to income-tax. The assessee firm, Mugneeram Bangur & Co., Land Department had been carrying on the business of land development for many years. Its business was to buy large blocks of land in the suburbs of Calcutta, develop the same and parcel out in small plots and sell at a profit. Originally it had seven partners, six of them being Bangurs and the seventh being one Charu Chandra Chatterjee. Two of the partners, namely, Mugneeram Bangur and Charu chandra Chatterjee, retired from the firm on July 11, 1945. The remaining partners were not willing to carry on the business with unlimited liability and decided to float a limited company which would take over the business of the firm. Accordingly, a new company was formed in the name mentioned above and incorporated as a public company on April 8, 1948. The five remaining partners of the firm were also the promoters of the new company which had four directors, two of them Bangurs and two being outsiders, namely, one Walter Robert Elliot and the late Sir Bejoy Prosad Singha Roy. The capital of the company was ₹ 34,....
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....the business was carried on was not a matter of any moment. (2) The name of the assessee firm is completely different from the name of the new company, there being nothing common between the two names. (3) The assessee firm carried on business at an address different from that of the company, the firm's address being No. 65, Sir Hariram Goenka Street, Calcutta, while the company's office was situated at No. 9, Clive Row, Calcutta. (4) There was no undertaking given by the members of the assessee firm not to carry on a business in land development in the old name and style and if they chose to carry on business in that name and style a transfer of the goodwill to the company was meaningless. (5) In the prospectus issued by the new company disclosing the balance-sheet of the vendor firm no value had been assigned to the goodwill. It was further argued on behalf of the department that as the partners had stated in the prospectus issued by the company that the properties which were being taken over at cost were according to market value well above the said cost price and as the value of the items Nos. 3 to 8 were fixed the appreciation could only be ascribed to the ris....
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....hat they had subscribed to the memorandum of association for all the shares in the company in certain proportions, each of the partners rendering himself liable to that extent for the debts of the company. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its last balance-sheet, a new balance-sheet was prepared showing a large value for the stock-in-trade. The Commissioner of Taxes claimed that the increase in value was a profit arising on the sale of the stock-in trade on which income-tax was leviable. Before the Judicial Committee it was argued by the appellant that, if the transaction was to be treated as a sale, there was no separate sale of the stock and no valuation of the stock as an item forming part of the aggregate which was sold and, secondly, that there was no sale at all but merely a re-adjustment of the business position of the two partners, the conversion of the business into a private limited company being for the convenience of carrying it on. In delivering the judgment of the Judicial Committee Lord Phillimore pointed out that "where, however, a business consists, as in the present case, entirel....
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....maintained according to the mercantile system under which stocks could be valued from year to year on the basis of their cost price both at the beginning and at the end of a particular year. In the course of the year 1942 the assessee withdrew some bars of silver and shares from the business and settled them on certain trusts. He was one of the beneficiaries in all the three trusts and retained to himself a reversionary life-interest after the death of his wife who was given the first life-interest. After certain other life-interests the ultimate beneficiaries were charities. In his books of account the appellant credited the business with the cost price of the bars and shares so withdrawn. The assessee claimed that this transaction did not involve a profit or gain to himself and was not taxable. On behalf of the department it was argued that the withdrawal of the bars and shares from the business must be dealt with according to ordinary and well known business principles, namely, that if a person withdraws an asset from a business he must account for it to the business at the market rate prevailing at the date of the withdrawal. It was further argued that the mere fact that the ap....
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....ied on by him. In return for the assets transferred, 5,600 shares out of 6,000 shares (the total number of shares issued by the company) were allotted to the assessee, the remaining 400 shares being given to his four sons at his instance. The Income- tax Officer valued the excess of the market price of the shares over their cost price at the date of the transfer as profit made by Sir Homi Mehta in the transaction. The stand taken by the department was negatived by Bombay High court and Chagla C.J. observed that for the purpose of income-tax a transaction must be looked at from a commercial point of view and in trying to determine whether a certain transaction resulted in profits, we must come to a conclusion that the transaction resulted in real profit, profits which from the commercial point of view meant a gain to the person who entered into the transaction, not profits from any narrow, technical or legalistic point of view. The learned Chief Justice further held that in transferring the shares to the limited company the assessee was not undertaking any business activity and said: "The important test of a business activity must always be that an activity is undertaken with....
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....account do not represent the real nature of the transaction as far as the sale is concerned; and if they do not represent the real nature of the transaction in that sense, they equally do not represent the real transaction from the point of view of the price fixed for this transaction." As against this proposition it was contended on behalf of the department mainly on the strength of a judgment of the House of Lords in Sharkey v. Wernher [1956] A.C. 58; 29 I.T.R. 962, that the withdrawal of the stock-in-trade, i.e., the land from the firm of Mugneeram Bangur & Co., Land Department, must be accounted for in the books of the firm at their market value at the date of the withdrawal as in Sharkey's case [1956] A.C. 58; 29 I.T.R. 962 and so regarded there was a profit assessable to tax. The facts in Sharkey's case [1956] A.C. 58; 29 I.T.R. 962 were as follows: Lady Zia Wernher carried on a stud farm and owned besides racing stables. At her farm she bred horses for her racing stables and from time to tie transferred horses from here farm to here stables. In the year ended December, 31, 1948, the transferred five horses from here stud farm to are stables. The cost of breed....
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....axpayers that market price and for the Crown that cost of production should be adopted as the appropriate figure in the accounts. Macnaghten J. upheld the contention of the taxpayers. Viscount Simonds noted that this decision had every since been adopted as the basis of assessment by the revenue in similar cases and observed "that the taxpayer may in certain cases be subject to a sort of dichotomy for income tax purposes and be regard as selling to himself in one capacity what he was produced in another, and secondly, that he is regarded as selling what he sells at market price". With regard to the second case, viscount Simonds noted that it recognized that for tax purposes two parts of an enterprises carried on by a taxpayer should be treated as distinct. Viscount Simonds observed that he could see no valid distinction between a trader crediting himself with a price (market value) which produces a profit or with a price (production cost) which strikes a balance or reduces his loss. According to the two cases "something has to be brought into account where the legislature recognises a sort of artificial dichotomy and a taxpayer regarded as carrying on more than one t....
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....s a different one. for we are required to assume... that the activities to which the accounts relate do constitute a trade for income tax purposes; and our problem is to determine what upon that basis are the proper entire to make in those trading accounts in relation to certain transactions with trade stock...all things considered, I do not think that we ought to treat the respondent's general proposition as precluding the possibility that the income tax scheme may be found to require that in certain citations a taxpayer should be treated as if he had dealt with himself on commercial terms." His Lordship went on to say that when a horse was transferred from the stud farm to the owner's personal account, there was unquestionably a disposition of trading stock. The three methods suggested in argument for recording the result in the stud farm's trading accounts were: (1) There might be no entry of a receipt at all; (2) the figure brought in as receipt might be costal and (3) the figure might be on the basis of the market value. With regard to the first method his Lordship said that although theoretically a trader could astray or let waste or give his stock, he did no....
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....missioner of Income-tax v. Bai Shrinbai K. Kooka [1956] 30 I.T.R. 753. In this case the assessee had first purchased shares for investment which she converted into here stock-in-trade for the purposes of carrying on a business in shares as from April 1, 1945. She thereafter sold some of the shares in the assessment year 1947-48 and the prices obtained by here were much higher than those at which she acquired the shares or those prevailing on April 1, 1945, when they were brought into her business in shares. The question arose as to what was the value of the shares to be taken for the purpose of ascertaining the profit. Chagla C.J. took the view that the difference between the price realised at the sales. This judgment has since been affirmed by the Supreme Court: See [1962] 46 I.T.R. 86 and the market value of the shares on April 1, 1945, represented the profits. On behalf of the department it was contended on to basis of Kikabhai's case [1953] 24 I.T.R. 506; [1954] S.C.R. 219, that as the assessee could not have done business with herself she could not have sold the shares to the business as on April 1, 1945, and therefore the difference between the price realised and the cost....
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....ht think fit. The company acquired copper boring land in the country of Fresno, extending over 480 acres at the price of ? 24,000 and expended the paid up capital of the company in the purchase and development of the property. Its total capital was ? 28,332 divided into as many shares of ? 1 each. The accounts showed that the cash capital of ? 4,332 was span in development, preliminary and head-office expenses. The company at first sold 80 acres of its property to the Fresno Copper Co. Ltd. at the price of ? 105,000 payable wholly in fully paid up share of the Fresno Copper Co. Ltd. and sold the remaining 400 acres of its property to the same company at the price of ? 195,000 payable likewise within a few months after the first transaction. At an extraordinary general meeting of the Californian copper Syndicate Ltd., a resolution was passed reducing the capital from ? 30,000 divided into thirty thousands shares of ? 1 each to ? 3,320-14s. divided into 28,332 shares of 1s. 2d. each issued and fully paid up and such reduction was to be effected by transferring tot he existing holders of the said 23,332 shares of the syndicate, ratably 283,320 shares of ? 1 each fully paid up of the F....
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.... does not relate to the withdrawal of a portion of the assets of a business but is a case where the business in transferred to a new channel or given a new look. It is not for me to speculate as to whether the Supreme Court would have applied the reasoning in Wernher's case [1956] A.C. 58; 29 I.T.R. 962, to Kikabhai's case [1953] 24 I.T.R. 506; [1954] S.C.R. 219. Doughty's case [1927] A.C. 327 was not referred to in Sharkey's case [1956] A.C. 58; 29 I.T.R. 962 probably because in the former the business came to an end whereas in the letter it went on with a reduction in the stock-in-trade. The principles in Doughty's case [1927] A.C. 327 are strictly applicable to the facts before us and are conclusive on the point. In my opinion, the answer to question No. 4 must be that there was no profit in the transaction by which the entire stock-in-trade and the business of the firm were transferred the the limited liability company. Again the fact that two outsiders were brought in as directors with seven shares allotted to them out of 39,300 shares makes no difference. In Sir Homi Mehta's case [1955] 28 I.T.R. 928, 400 shares out of 6,000 shares were allotted to Si....