1964-VIL-28-ALH-DT

Equivalent Citation: [1964] 54 ITR 315 (All)

ALLAHABAD HIGH COURT

Income-tax Reference No 315 of 1958

Dated: 08.04.1964

RB. LACHMAN DAS MOHANLAL & SONS

COMMISSIONER OF INCOME-TAX, UP

Bench

M. C. DESAI C.J. AND R. S. PATHAK, J.

STATEMENT OF CASE

By this application the assessee requires the Appellate Tribunal to state a case to the High Court on several questions of law which are said to arise out of the Tribunal's order in I.T.A. No. 411 of 1956-57, dated February 28, 1957. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 66(1) of the Indian Income-tax Act, 1922.

2. The facts briefly are that the assessee is a firm of six partners which carried on business in the manufacture and sale of sugar, molasses, confectionery, golden syrup and extraction and sale of rice and oils. The assessee also owned certain sugar mills comprising the plant and machinery and the lands appurtenant thereto used for the purpose of the said business. On January 21, 1948, the said business was sold as a going concern by the assessee firm to R.B. Lachmandas Mohan Lal and Sons Ltd., a private limited liability company incorporated on January 20, 1948. The memorandum and articles of association of the said company are annexed hereto as annexures "A" and "B", which form part of the case. They are, however, not printed in order to save cost and the assessee has undertaken to furnish copies to their Lordships at the time of the hearing. The Controller of Capital Issues issued a certificate to the said company, dated January 12, 1948, a copy whereof is annexed hereto as annexure "C" and forming part of the case.

3. The transfer to the said company by the assessee is evidenced by an agreement of sale dated January 20, 1948, and a sale deed dated January 21, 1948, which are annexed hereto as annexures "D" and "E" and forming part of the case.

4. According to the sale deed, the consideration for the land, buildings, machinery, plant and other assets was fixed at Rs 30,00,000. Out of this, the cost of assets on which depreciation had been allowed to the assessee-firm was found to be Rs 10,40,742. The written-down value of these assets was Rs 5,34,185. Therefore, according to section 10(2)(vii) of the Act the difference of Rs 5,06,557 was held by the Income-tax Officer to be includible in the assessee's total income under the second proviso to section 10(2)(vii) of the Act. Further according to the Income- tax Officer, the sale of the said assets to the company resulted in excess receipts of Rs 19,59,258 (Rs. 30,00,000 minus Rs 10,40,742) in the hands of the assessee-firm, which was liable to be taxed as capital gains under the provisions of section 12B of the Indian Income-tax Act. The assessee-firm had also sold its stocks of sugar to the limited company, which had resulted in a profit of Rs 2,05,041. This was also held to be sale of the stock-in-trade of the assessee-firm and was brought to tax by the Income-tax Officer. The quantum of the aforesaid three impugned items is not in dispute.

5. The relevant year of assessment is 1949-50, the accounting year being the year ending 30th September, 1948.

6. The relevant provisions of the Act and Ordinance, on which reliance is placed by the parties are as under:

"(1) Taxation Laws Amendment Ordinance, 1949.

ORDINANCE NO. IX OF 1949 CHAPTER I PRELIMINARY

1. Short title, extent and commencement.--(1) This Ordinance may be called the Taxation Laws Amendment Ordinance, 1949.

2. Chapter II shall be deemed to have come into force on the 31st day of March, 1949, and the remaining provisions of this Ordinance shall, unless otherwise expressly provided herein, come into force at once.

CHAPTER II

"Amendment of section 10, Act XI of 1922.--In section 10 of the Income-tax Act,--

(1) in sub-section (2)--

(i) after clause (vi), the following clause shall be inserted, namely:--...

(ii) in the second proviso to clause (vii), for the words 'is sold' the words, 'is sold, whether during the continuance of the business or after the cessation thereof, 'shall be substituted;"

"(2) Taxation Laws Amendment (Second) Ordinance, 1949.

ORDINANCE NO. XXXIII OF 1949 CHAPTER I PRELIMINARY

Clause 1(2).--Chapter II shall be deemed to have come into force on the 31st day of March, 1949, and the remaining provisions of this Ordinance shall, unless otherwise expressly provided herein, come into force at once, and this Ordinance shall cease to have effect as soon as an Act entitled the Taxation Laws (Extension to Merged States and Amendment) Act, 1949, shall have come into force.

CHAPTER II

3. Amendment of section 10, Act XI of 1922.--In section 10 of the Income-tax Act,--

(1) in sub-section (2),--...

(ii) in the second proviso to clause (vii), for the words 'is sold' the words 'is sold, whether during the continuance of the business or after the cessation thereof, 'shall be substituted;"

"(3) The Taxation Laws (Extension to Merged States and Amendment) Act, 1949.

(Received the assent of the Governor-General on the 31st December, 1949).

ACT NO. LXVII OF 1949 CHAPTER II

3. Extension of Taxation Laws to Merged States.--(1) The following Acts, namely:--...

(2) The Indian ?ncome-tax Act, 1922, the Business Profits Tax Act, 1947, and the Indian Finance Act, 1949, and all Rules and Orders made thereunder, shall operate as if they had been extended to, and brought into force in, all the merged States on the 1st day of April, 1949.

"(4) Section 10(2)(vii):

(vii) in respect of any such building, machinery, or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery, or plant, as the case may be, is actually sold or its scrap value:...

Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place."

"(5) Section 12B:...

Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes or any distribution of capital assets on the total or partial partition of a Hindu undivided family, or on the dissolution of a firm or other association of persons, or on the liquidation of a company, or under a deed of gift, bequest, will or transfer of irrevocable trust shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets."

7. The sum of Rs 30,00,000 was credited to the personal accounts of the partners of the firm in accordance with their shares in the firm as shown below:

		Rs.
R.B. Lachmandas	...	5,62,500
L. Mohan Lal	...	3,75,000
L. Mulk Raj	...	5,62,500
L. Banarsi Das	...	5,62,500
L. Dwarka Das	...	5,62,500
L. Kanhaiya Lal	...	3,75,000
	Total	30,00,000

It was contended for the assessee that the sums of Rs 5,06,557 and Rs 19,59,258 were not chargeable to tax under the second proviso to section 10(2)(vii) and section 12B respectively.

8. The assessee's case was:

(a) that the firm was dissolved on 20th January, 1948, and that the sale to the company on 21st January, 1948, was by the individual partners of the dissolved firm and not by the firm as suc?;

(b) that the firm having been dissolved on 20th January, 1948, should have been assessed for the broken period October 1, 1947, to January 20, 1948, i.e., for the assessment year 1948-49 in terms of section 25(1) of the Act;

(c) that the second proviso as amended by the words "whether during the continuance of the business or after the cessation thereof", did not apply to an assessment either for the assessment year 1948-49 or the assessment year 1949-50;

(d) that the surplus realised was not chargeable as capital gains under section 12B of the Act as the sale was effected by the individual partners and therefore, fell within the exemption mentioned in the third proviso to sub-section (1) of section 12B;

(e) that the excess receipts on the sale of stocks of sugar to the company on January, 1948, was not chargeable to tax.

9. The Income-tax Officer negatived the assessee's contentions. The Appellate Assistant Commissioner although agreeing with the assessee's contention that the second proviso to section 10(2)(vii) as amended would not apply to the assessment year 1949-50, confirmed the Income-tax Officer's finding as to the assessee's liability under the second proviso to section 10(2)(vii) on the ground that the assessee had sold the business to the company as a "going concern" and also confirmed the Income-tax Officer's findings regarding the liability to capital gains tax on the sum of Rs 19,59,258 and tax liability in respect of excess receipt on the sale of stocks of sugar.

10. The Tribunal for the reasons set out in its order under section 33(4), annexed hereto as annexure "F" and forming part of the case held:

(1) that there was no deed of dissolution and neither dissolution of the firm nor distribution of assets had taken place on January 20, 1948, as claimed;

(2) that the business was transferred as a going concern with its goodwill;

(3) that the business transfer was by the partners on behalf of the assessee firm;

(4) that the assessee could not have claimed an assessment for the broken period from October 1, 1947, to January 20, 1948, under section 25(1) of the Act;

(5) that the amended section 10(2)(vii) fully applies to the relevant assessment year 1949-50;

(6) that the third proviso to section 12B(1) had no application to the facts of this case; and

(7) that sugar constituted the stock-in-trade of the assessee, which was sold in lump instead of piecemeal to the company and had rightly been taxed as profit.

11. Out of the above facts the questions of law that arise are:

"(1) Whether on the facts and circumstances of the case the sale on January 21, 1948, was by the assessee firm or by its partners in their individual capacity?

(2) Whether on the facts and circumstances of the case the sum of Rs 5,06,557 being the difference between the original cost and the written down value of assets is chargeable under section 10(2)(vii) of the Act?

(3) Whether on the facts and circumstances of the case the sum of Rs 19,59,258 is chargeable as capital gains under section 12B of the Income-tax Act?"

12. The respondent accepts the statement of the case as drawn and has no suggestions to offer. The suggestions made by Shri Tricumdas for the assessee have been incorporated in the final draft. He agrees that all the facts have been correctly stated, but urges that questions Nos. 1 and 5 as set out in the application under section 66(1) be also referred and the Income-tax Officer's and the Appellate Assistant Commissioner's orders may be made a part of the case. Questions Nos. 1 and 5 raise questions of fact and we therefore see no reason to refer them. The Income-tax Officer's and the Appellate Assistant Commissioner's orders are annexed hereto at the request of the assessee as "G" and "H".

SUPPLEMENTARY STATEMENT OF CASE

In accordance with the order of the High Court of Judicature at Allahabad dated 3rd August, 1959, in Misc. Application No. 2316 of 1959 in I.T. Reference No. 315 of 1958, we hereby draw up a supplementary statement of the case.

2. The assessee was a firm consisting of six partners, viz.:

(1) Lachmandas, (2) Mohanlal, (3) Mulkraj, (4) Banrasi Das, (5) Dwarka Das, and (6) Kanhaiya Lal.

The accounting year relevant to the assessment year 1949-50 is the year ending September 30, 1948. The business of the assessee-firm was that of manufacture and sale of sugar, molasses, confectionery, golden syrup and extraction and sale of rice and oil. It also owned sugar mills in the form of land, buildings, plant and machinery for the purpose of the said business.

3. The said business was transferred as a going concern to a private limited company called R.B. Lachmandas Mohan Lal and Sons Ltd. (hereinafter called the company) by a deed of sale dated January 21, 1948. The issued capital of the private limited company was 4,000 shares of Rs 1,000 each. The following are the shareholders with their respective shareholdings:

		Rs.
(1) Lachmandas	...	7,21,000
(2) Mulk Raj	...	7,10,000
(3) Banarsi Das	...	6,80,000
(4) L. Dwarka Das	...	6,97,000
(5) L. Mohan Lal (nephew)	...	4,44,000
(6) L. Kanhaiyalal (son of)	...	4,08,000
		36,60.000
(7) Smt. Ishwarkuar (wife of 1)	...	25,000
(8) Smt. Lalta Rani (wife of 2)	...	11,000
(9) Smt. Premvati (wife of 3)	...	10,000
(10) Smt. Brij Rani (wife of 4)	...	11,000
(11) Smt. Janak Rani (wife of 6)	...	27,000
		37,44,000

The book value of the fixed assets as per the assessee's books as on January 20, 1948, was under:

		Rs.	As.	Ps.
Land	...	12,244	8	0
Building 1st class	...	79,446	3	0
,, 2nd class	...	69,738	2	0
Plant and machinery	...	3,67,267	7	3
Weigh bridge	...	3,659	2	0
Railway siding tube-well	...	872	10	9
Cars and trucks	...	44,624	5	0
Laboratory expenses	...	3,6,51	0	0
Furniture and fittings	...	1,440	1	6
		5,89,550	3	6

The above sum of Rs 5,89,550-3-6 was debited to the six partners' accounts in their profit sharing proporti?ns. The consideration amount for the transfer of the assets to the company was Rs 30,00,000. This amount was divided and credited to the six partners' accounts in their profit sharing proportion as on January 20, 1948.

4. The stocks of sugar, molasses, stores and sundry other materials were transferred to the company for Rs 24,55,139-8-0. The value of sugar included in this was Rs 21,50,148-8-6. The details are as under:

		Rs.	As.	Ps.	Rs.	As.	Ps.
Sugar 16926¼ maunds	@	35	12	6	6,06,642	6	0
O. 27
E. 27 44646¼ "	@	35	11	0	15,93,313	0	9
D. 26 71½ "	@	35	10	6	2,549	6	9
E. 27 2420 "	@	35	11	0	86,563	12	0
Rori remitted 103 maunds	@	35	11	0	3,711	8	0
					22,91,580	1	6
Less Excise duty	1,41,431	9	0

The crushing season started on December 11, 1947. The assessee worked the sugar factory till January 20, 1948, i.e., 41 days. A profit and loss account for the period ending January 20, 1948, was prepared. The sale of sugar during the period amounted to Rs 25,56,144-14-3. Of this, Rs 21,50,148-8-6 represents the transfer of stock of sugar to the company. The profit during this period amounted to Rs 3,53,256-13-6. This was credited to the six partners in proportion to their profit sharing ratio.

5. The assessee furnished a return of income on September 15, 1949, for the previous year ending September 30, 1948, showing an income of Rs 3,07,593-11-9. Another return was filed on February 25, 1950, showing an income of Rs 2,75,713 after adjusting for certain revenue expenses incurred by the company on behalf of the firm. On April 10, 1952, yet another return was filed showing an income of Rs 76,015-10-6.

6. The assessee sold 20,143 bags of "old sugar" prior to the transfer of the business to limited company and 5,838 bags and 117½ maunds of opening stock were (sold) to the company. The sale value was Rs 12,77,918-10-0 and Rs 5,41,040-2-3 respectively. Similarly in regard to new sugar the sales to outsiders prior to the transfer to the company were 7,692 bags for Rs 7,55,032-5-3. The transfer to the company were 16,578 bags together with 2,420 maunds of sugar in process and they were valued at Rs 16,09,108-6-2. The total transfer to the company were Rs 21,50,148.

7. The assessee-firm ascertained the profit rate of "old sugar" at 1.106 per cent. on sales and at 11.915 per cent. on sales of "new sugar". Applying these rates to the transfer to the company, the assessee firm worked out the profit on the transfer sale of Rs 21,50,148 to the company at Rs 5,990¼ plus Rs 1,91,737 minus Rs 1,97,727. Similarly in regard to molasses, mustard, ground-nut and khandsari sugar which had also been transferred to the company the assessee firm had ascertained the profit. They amounted to Rs 3,814. The total profit on the transfer of sugar, molasses, mustard oil, and ground-nut oil to the company amounted to Rs 2,01,541. The figure of Rs 2,05,041 given in the statement of the case appears to be wrong. The profit on the sales prior to the transfer of the assessee's business amounted to Rs 75,743. The assessee-firm returned this together with an adjustment for charity in the return filed on April 10, 1952.

8. It was contended before the Income-tax Officer that the profit on the sales of sugar, molasses etc. made by the firm to the company on January 20, 1948, was a capital receipt and should not therefore be taxed. This claim was rejected by the Income-tax Officer on the ground that the business of the assessees had been transferred as a going concern and that all the profits made by the firm on the sale of its assets or stocks were liable to tax.

9. The assessee's appeal to the Appellate Assistant Commissioner was not successful. He held that the sale of the stock of sugar, etc., was only a part of the sale or transfer of the assets of the appellant's firm as a going concern to the l?mited company and that the profits on the sales could not therefore be said to have accrued as a result of the winding up of the firm.

10. In the second appeal to the Tribunal, it upheld the decision of the Appellate Assistant Commissioner. It observed that the firm as such transferred the stocks to the private limited liability company at a price which was near about the market rate. Sugar undoubtedly was stock-in-trade which was intended to be converted into money. The sale of sugar in this case was identifiable. The only difference is that instead of selling sugar in piecemeal to several dealers, the assessee sold the same in bulk to the private limited liability company.

11. On these facts, the question of law is:

"Whether the excess receipts on the transfer (sale) of the stock of sugar to the limited concern is chargeable to tax under section 10 of the Income-tax Act?"

12. The order of the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have already been annexed and form part of the case in the connected reference by the assessee (R.A. No. 462 of 1957-58).

13. The draft statement of the case was placed before the parties. The suggestions made by the department's representative and the assessee's counsel have been carried out. The statement is finalised.

B. L. Gupta, Ashoke Gupta and L. D. Seth, for the assessee

R. L. Gulati, for the Commissioner

JUDGMENT

The judgment of the court was delivered by

R.S. PATHAK J.--The assessee is a firm consisting of six partners. It carried on business in the manufacture and sale of sugar, molasses, confectionery and also in the extraction and sale of oils. It owned a sugar mill. On January 21, 1948, the business was transferred as a running concern by the assessee to a private limited company, R.B. Lachmandas Mohanlal and Sons, Ltd., which was incorporated the previous day. On the date on which the company was incorporated, the assessee entered into an agreement to sell the business to the company, and on January 21, 1948, a sale deed was executed. Under the terms of the sale deed, the consideration for the land, buildings, machinery, plant and other assets was determined at Rs 30,00,000. The original cost of the assets, on which depreciation was allowed to the assessee under the Income-tax Act, was Rs 10,40,742 and the written down value of these assets was Rs 5,34,185.

During the assessment proceedings for the assessment year 1949-50 (the relevant previous year being the year ending September 30, 1948), the Income-tax Officer applied the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922, and held that a sum of Rs 5,06,557 was liable to be included in the assessee's total income. The Income-tax Officer also came to the opinion that the sale of the assets by the assessee to the company resulted in a capital gain of Rs 19,59,258 and assessed this sum under section 12B of the Act. Besides, the assessee had also sold its stocks of sugar to the company resulting in a profit of Rs 2,05,041. The Income- tax Officer treated this profit as arising out of the sale of the assessee's stock-in-trade and accordingly included it in the assessable income of the assessee.

The Appellate Assistant Commissioner dismissed the assessee's appeal against the inclusion of the amounts ?entioned above in the assessment order, and an appeal before the Income-tax Appellate Tribunal by the assessee was also unsuccessful. The assessee then applied for a reference to this court under section 66(1) of the Act, and the Tribunal has referred the following questions:

"Whether on the facts and circumstances of the case the sale on January 21, 1948, was by the assessee-firm or by its partners in their individual capacity?

(3) Whether on the facts and circumstances of the case the sum of Rs 19,59,258 is chargeable as capital gains under section 12B of the Income- tax Act?"

The assessee had also sought the reference of some other questions to this court, and as those questions were not referred by the Tribunal, an application was made to this court, purporting to be under section 66(4) of the Act, praying that a statement of the case in respect of those other questions should be requisitioned. This application was allowed on August 3, 1959, and consequently, the Tribunal submitted a supplementary statement of the case dated September 23, 1959, to this court for its opinion on the following further questions:

"Whether the excess receipts on the transfer (sale) of the stock of sugar to the limited concern is chargeable to tax under section 10 of the Income-tax Act?"

Learned counsel on behalf of the Commissioner of Income-tax has raised a preliminary objection to our entertaining the supplementary statement of the case. He urges that the application, upon which this court called for a statement in respect of a further question of law and consequent to which the supplementary statement was submitted to this court, was an application made under section 66(4) and was, therefore, not maintainable. Since the application was not maintainable, it is argued, no valid reference could be called for by this court nor made by the Tribunal. The Supreme Court in Kamlapat Motilal v. Commissioner of Income-tax [1962] 45 I.T.R. 266 (S.C.) has held that where the Tribunal does not refer all the questions of law raised by the assessee but only some of them, an assessee desiring that other questions of law should also be referred to the High Court must apply to the court under section 66(2) and not under section 66(4). It is not disputed that the application made by the assessee was an application under section 66(4). Learned counsel for the assessee, however, prays that the application under section 66(4) may be treated as one under section 66(2), and urges that if that be done then the reference subsequently made by the Tribunal is a competent reference. It is difficult to accede to this suggestion. The application disposed of by this court on August 3, 1959, was dealt with as an application under section 66(4). Even if it were possible now to suppose that the application was disposed of under section 66(2), that cannot be done unless, inter alia, the assessee can show that it was made within the period of limitation for making an application under section 66(2). The application, ex facie, was one made under section 66(4), and the burden lies upon the assessee to show that it could have been treated as an application under section 66(2). The assessee has been unable to establish that the application was made within six months of the receipt of the order under section 66(1). It is also not possible to say that if the application was made beyond the period of limitation the delay in making it could be presumed to have been condoned by the court. When the plea that the application should be considered as one under section 66(2) was never raised before the court at that stage, the question whether the application was barred by limitation and, if so, whether the delay should be condoned, cannot be said to have been present in the mind of the court when disposing of the application. Neither is it possible for us to dispose of the application under section 66(2) with retrospective effect from August 3, 1959, nor can we treat it as having been disposed of under section 66(2). It is then pointed out for the assessee that the order disposing of the application had become final much before the decision of the Supreme Court in Kamlapat Motilal's case* and it is urged that we should hold that the decision of the Supreme Court cannot undo the effect of that order which had become final. It is pointed out that the supplementary statement of the case was also submitted before the date of the Supreme Court decision. There is no doubt that the order of this court on the application and the submission of the supplementary statement of the case precede in point of time the decision of the Supreme Court. But that circumstance, it seems to us, can be of no assistance to the assessee. The Supreme Court in Kamlapat Motilal's case [1962] 45 I.T.R. 266 (S.C.) merely stated what the law always was. That being so, clearly the application was not maintainable under section 66(4), and the order of this court calling for a reference upon a further question was entirely without jurisdiction. The consequent reference made by the Tribunal must, therefore, be considered as incompetent. We are, accordingly, of the opinion that the preliminary objection must be upheld. In the result, we decline to answer the question referred in the supplementary statement of the case.

Turning to the questions referred by the original statement of the case, it seems to us that the answer to the first question is plainly that the sale on January 21, 1948, was effected by the assessee and not by its partners in their individual capacity. Learned counsel for the assessee has not seriously pressed the contention that the sale was by the individual partners. Indeed, it appears to us that the contention is not capable of serious consideration having regard to the several circumstances detailed in the appellate order of the Tribunal. The Tribunal has pointed out that there is no deed of dissolution of the firm nor any other evidence of its dissolution. The agreement of sale also discloses that the assessee was party to the agreement and not its partners as individuals. The agreement plainly shows that the business was transferred as a going concern. If the firm had suffered dissolutions and the assets had been divided, there would have been no occasion for transferring a running business. These and the other circumstances, including the fact that the memorandum of association of the company mentioned as one of its objects the acquisition as a going concern of the business carried on by the assessee, and that the certificate of the Controller of Capital Issues also contained a recital to the same effect, leave no doubt that the firm was not dissolved at all at the time when its business and assets were transferred to the company.

In respect of the second question referred by the Tribunal, learned counsel for the assessee contends that there was no sale of the?assets and, therefore, the second proviso to section 10(2)(vii) did not apply. The argument in substance is that inasmuch as the assets were transferred by the assessee to the company, and the persons constituting the assessee were also the shareholders of the company, it cannot be said that any sale, in the sense in which that term is understood in commercial circles, has taken place, and learned counsel relies upon the decision of the Bombay High Court in Commissioner of Income-tax v. Sir Homi Mehta's Executors [1955] 28 I.T.R. 928. It does not appear that the point was raised in this form before the Tribunal in appeal. But even assuming that question can be raised before us, we find it difficult to accept the contention on its merits. It seems to us that the decision of the Bombay High Court turned upon the consideration that the persons who originally held the shares and persons to whom the shares were allotted subsequently upon transfer when the limited company was incorporated were the same. Chagla C.J. who delivered the judgment of the court, observed:

"Sir Homi Mehta owned these shares jointly with his sons. The result of the formation of this private limited company and the so-called sale of these shares to the limited company was that these very shares instead of being held by Sir Homi Mehta and his sons jointly in their individual capacity were held by these very persons constituted into a limited company. We are quite conscious of the distinction which has been constantly emphasised by the Advocate-General in this reference between an individual as an entity and a limited company as an entity. and there can be no doubt that in law Sir Homi Mehta and his sons were very different entities from Sir Homi Mehta & Sons Limited. But what the Advocate-General is doing is looking at the matter from a legal aspect, but in truth and in substance the only result of this particular transaction was that Sir Homi Mehta and his sons held these very shares in a different way from the way they held before the transaction was completed. They adopted a different mode, the mode of the formation of the limited company with all its advantages, in order to hold these shares and to deal with these shares and to make profit out of these shares."

Similarly, in Commissioner of Income-tax v. Mugneeram Bangur & Co., [1963] 47 I.T.R. 565 the Calcutta High Court, considering a case where a firm consisting of five partners floated a limited company and transferred its entire business and assets to the company, and where, except for 7 shares, the entire share holding of 34,993 shares were allotted to the partners of the firm and the consideration for the transfer was the allotment of these shares, held on the basis of the principle that there cannot be a sale by a person to himself that there was no profit in the transaction. Again, in Commissioner of Income-tax v. Morning Star Bus Service [1963] 49 I.T.R. 927 the Kerala High Court held that the second proviso to section 10(2)(vii) would not apply where no sale or profit in any commercial sense occurs because of the virtual identity of the vendor and the vendee.

In the instant case there is nothing to show that the partners constitu? ting the assessee were the only shareholders of the company or that they held almost all the shares issued by the company. The certificate issued by the Controller of Capital Issues on January 12, 1948, discloses that shares of the value of Rs 40,00,000 were to be issued by the company. Paragraph 7 of the statement of the case, however, indicates that the shares of the company allotted to the partners of the assessee were of the total value of Rs 30,00,000 only. This would seem to indicate that there were other shareholders also. In any event, since the question was not raised before the Tribunal in the form in which it has now been argued before us, the Tribunal gave no finding of fact as to whether there was virtual identity between the shareholders of the company and the partners of the assessee. In the circumstances the principle invoked by the assessee cannot be applied in the instant case. Learned counsel for the Commissioner urged that the decision in the aforesaid cases did not lay down the correct law, and that even though the persons who were the only shareholders of the transferee company were also the partners constituting the transferor firm, a distinction had to be maintained between the company as a corporate entity and its shareholders. Reference was made in this behalf to the decision of the Patna High Court in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax*. In the view that we are taking, it is not necessary to decide this issue. No other point has been pressed in respect of the second question. Accordingly, we answer that question in the affirmative.

The assessee contends that the gain of Rs 19,59,258 is not chargeable as capital gains under section 12B because the instant case is covered by the terms of the third proviso to section 12B. That proviso protects profits or gains from the levy of tax under section 12B where there is a distribution of capital assets on the dissolution of a firm. It has been found in the instant case that the assessee was not dissolved on the date of the sale and there was no distribution of its capital assets between the partners. The third proviso to section 12B, therefore, does not apply. Accordingly, we answer the third question in the affirmative.

A copy of this judgment under the seal of the court and the signature of Registrar shall be sent to the Appellate Tribunal. The Commissioner is entitled to his costs which we assess at Rs 200. The counsel's fee is assessed at Rs 200.