TaxTMI 
TaxTMI 
1967 (11) TMI 30
X X X X Extracts X X X X
X X X X Extracts X X X X
....Patel Engineering Co. became interested in the said venture. The stock of the machinery, remaining unsold, was thereafter divided between the assessee-company and Patel Engineering Co. The assessee-company received machinery valued at Rs. 2,06,372 in its share. In the assessee-company's account books for 1949-50, the value of the machinery was written up by Rs. 4,00,000, an equivalent sum having been credited to a reserve capital account. During this accounting period, the assessee and Patel Engineering Co. formed a partnership firm known as "Hind Patel Co." in which each had an 8 annas share and the assessee transferred this stock of machinery, at the book value of Rs. 6,06,372, to the new firm. Similarly, Messrs. Patel Engineering Co. also transferred their share of machinery, which they had received on the dissolution of joint venture, to the new firm, after similarly appreciating the value of the machinery. The machinery thus valued at Rs. 6,06,372 by each of the partners remained the investment of each one of them in their partnership firm, Messrs. Hind Patel Co. On 1st April, 1950, counter-debit and credit entries were made in the assessee's and the firm's books, respectively....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e sellers being the assessee-company. (b) The transaction should be looked at from a commercial point of view. The assessee had to show in his books of account that the value of the machinery was originally Rs. 2,06,745 and the value of the same machinery was put in the firm's account at an appreciated value of Rs. 6,06,373. Thus, there is a clear transfer of the partner's asset to the firm for a higher value of Rs. 6,06,373. The machinery was assessed at a higher value because the assessee-company was convinced that that value was the correct value of the machinery in the market. (c) The transfer or sale of the machinery at a higher value or price took place between two distinct personalities, namely, the assessee-company and the partnership firm, and, as such, the Tribunal wrongly held that no element of transfer of sale could be involved in the transactions between the same parties. Mr. A. C. Mitra, learned counsel for the assessee, has submitted before us that there was no question of any sale or transfer between the assessee-company and the partnership firm, inasmuch as the partnership firm was not a juristic person. Further, relying on a large number of decisions, he has w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional." In Commissioner of Income-tax v. Homi Mehta's Executors, where the assessee and his sons formed a private limited company and transferred to that company shares in several joint stock companies which the assessee had held jointly with his sons for Rs. 40,97,000, which was the market value of the shares at that time. It was found that these shares originally did cost to the assessee only Rs. 30,45,017. The income-tax authorities levied income-tax on the difference between the market value and the cost price of the shares on the ground that the assessee had made a profit. The Bombay High Court held that, though the assessee and his sons on the one hand and the private limited company on the other were distinct entities in law, the real result of the formation of the company and the transfer of the shares to that company was only that instead of the shares being jointly held as individuals, they were held by these very persons as a limited company. The High Court came to the conclusion that the so-called sale of the shares to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d explained by the Supreme Court in Commissioner of Income-tax v. Bai Shirinbai K. Kooka. In this case the assessee, who held by way of investment several shares in companies, commenced a business in shares converting the shares into stock-in-trade of the business and subsequently sold these shares at a profit. A Bench of the Supreme Court of seven judges (A. K. Sarkar J., as he then was, dissenting) came to the conclusion that the assessee's assessable profits on the sale of the shares was the difference between the sale price of the shares and the market price of the shares prevailing on the date when the shares were converted into stock-in-trade of its business in shares, and not the difference between the sale price and the price at which the shares were originally purchased by the assessee. S. K. Das J., in not applying the principles of Kikabhai's case, distinguished the facts of the case before them from Kikabhai's case, in the following way at page 92: " From what has been stated above it would at once appear that Kikabhai's case was the converse of the present case. In Kikabhai's case, a part of the stock-in-trade was withdrawn from the business; there was no sale nor any....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 2,68,628-7-7 and goodwill fixed at Rs. 2,50,000. The Income-tax Officer held that a sum of Rs. 2,50,000 was actually charged by the vendor as a lump sum amount to profits as a sale of valuable stock-in-trade and not goodwill as alleged. The Appellate Assistant Commissioner on appeal held that the said sum of Rs. 2,50,000 was the value of the goodwill. The Tribunal, however, on appeal, held that the sale was the sale of a business as a going concern of the value of the stock-in-trade and therefore the profits arising out of sale was taxable income. The High Court in deciding the reference in favour of the assessee came to the conclusion that there was no profit in the transaction by which the entire stock-in-trade of the business of the firm was transferred to the limited liability company. The Supreme Court, after discussing Doughty's case and Commissioner of income-tax v. West Coast Chemicals and Industries Ltd., came to the conclusion that the sale was the sale of the whole concern and no part of the slump price is attributable to the cost of the land. In that case Sikri J. has stated at page 305: " As the vendors were transferring the concern to a company, constituted by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of each item of property sold was expressly mentioned in the agreement of sale. The contention that the transaction of sale was a mere attempt to readjust the business position of the transferor was never raised before the Tribunal and does not arise out of the order of the Tribunal." Thus, it is clear that in that case, the Supreme Court proceeded on the basis of the Tribunal's finding. The Tribunal there observed that the Associated Clothiers Ltd. were owners of a business having assets and liabilities and they by sale of Phelps & Co. Ltd. got the entire ownership by way of shares and the same assets and liabilities remained in the hands of Phelps & Co. Ltd. Thus, not only was there a finding as to the sale but also the Tribunal found that consideration of each item of the property sold was specifically mentioned in the agreement of sale. The Supreme Court, however, did not express its final opinion on the question whether in taxing cases, it is open to the assessing authorities to ignore the corporate personality of a company and to hold that the interests of the shareholders in the shares of a company and on the business of the company is identical and transfers by the own....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... taxing authorities and they came to the conclusion that the market value of the horses was considerably in excess of the cost of breeding and, as such, the market value of the horses should be regarded as the amount having been received in the stud farm." In our view, the taxability of a sum as income or profit would depend upon the real character or the substance of the transaction which yields such income or profit. In the instant case, we cannot agree with the contention that any transfer or sale has taken place between the assessee-company and the partnership firm. The transfer or sale is a bilateral transaction and there must be at least two persons-the transferor or the vendor on the one hand and the transferee or the purchaser on the other. In the facts of this case, the assessee-company's share of the machinery was valued originally at Rs. 2,06,745. Before the assets were transferred to the partnership firm, the assessee's share of the machinery was revalued at Rs. 6,06,372 and the said amount was entered in the assessee's books of account before the transfer. Whether this appreciated value is the market value or not, we do not know. The assessee might have increased the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hip Act, 1932, which reads as follows: " Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the firm name." It appears from this definition that a firm cannot be called a separate entity. The same persons who are individually called partners are collectively known as the firm for the purpose of their business. The firm always consists of partners and the partners always are parts of the firm. Procedurally and for limited purpose a firm has been separately described, but in no sense, can a firm be called a juristic entity like a limited company. The name of a firm is the business name of the partners and, thus, when a person in individual capacity transfers his assets to his own firm, it cannot be said that the partner is transferring his assets to a distinct person. We agree with Mr. Pal that a firm may have a character distinct from a partner but such distinction is not because the firm and the partners ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ership Act, 3rd edition, has made the following observations: " A firm is currently regarded as something distinct from its members; they may have claims on the firm's property but it is not theirs; it has separate accounts, and is their debtor and creditor. Quite possibly some person who is not a member of the firm may have authority to do certain things in its name which some or one of the partners have not. In short, the firm is treated very much as if it were a corporation; it is an artifical or 'moral' person for business purposes. . . . " Thus, a partnership firm in India, although for limited purposes, is an individual or person or an entity, a legal personality cannot be attributed to it. In this connection reference may be made to a judgment of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax, where S. R. Das C. J., after discussing the juristic character of a partnership firm, held that a firm is not an entity or a person in law but merely a person or individual and a firm name is the collective name of these individuals who constitute the firm. The Judicial Committee also has held in Bhagwanji Morarji Goculdas v. Alembic Commercial Works, that ....