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SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commr. of Income Tax, (Central) Calcutta, Appellant
Versus
M/s. Mugneeram Bangur and Co. (Land Department), Respondent.
Civil Appeal No. 310 of 1964.
Advocates appeared
M/s. N. D. Karkhanis, Gopal Singh and R. N. Sachthey, Advocates, for Appellant; Mr. A. V. Viswanatha Sastri, Senior Advocate, (M/s. S. Murthy and B. P. Maheshwari, Advocates with him), for Respondent.
INCOME TAX - SALE OF BUSINESS AS A GOING CONCERN - PROFIT ARISING OUT OF SALE - WHETHER TAXABLE - DOUGHTY'S CASE, 1927 AC 327 APPLIED.
Fact of the Case:
The assessee, a firm carrying on the business of land development, sold its entire business to a company promoted by the partners of the firm. The consideration for the sale was paid by allotment of shares in the company to the vendors. The Income Tax Officer held that the sum of Rs.2,50,000 shown as the value of goodwill in the agreement for sale was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock in trade. The Appellate Assistant Commissioner held that the said sum of Rs.2,50,000 was the value of the goodwill and that the profit arising out of the sale was not taxable as it was a capital gain.
Finding of the Court:
The Appellate Tribunal held that the sale was a sale of business as a going concern and that the value of the stock could be traced, and, therefore, the profits arising out of the sale was taxable income. However, the Tribunal dismissed the appeal on the ground that although the vendors were a different entity from the vendee, the first being a partnership and the second being a limited company, the transaction was mere adjustment of the business position of the partners.
Issues: 1. Whether the sale of the entire business as a going concern resulted in taxable profit? 2. Whether the sum of Rs.2,50,000 shown as the value of goodwill in the agreement for sale was actually charged by the vendors as a lump sum amount of profits on sale of valuable stock in trade?
Ratio Decidendi: The Supreme Court held that the sale was a sale of the whole concern and no part of the slump price is attributable to the cost of land. If this is so, it is clear from the decision of his Court in 1962-46 ITR 135 (SC) and Doughty's case, 1927 AC 327 that no part of the slump price is taxable.
Final Decision: The Supreme Court answered question No. 3 in the negative and dismissed the appeal with costs.
Judgement
SIKRI, J.: This is an appeal by special leave directed against the judgment of the High Court at Calcutta in a reference under S. 66 of the Income Tax Act. The four questions referred to the High Court by the Income Tax Appellate Tribunal are:
"(1) Whether on the facts and circumstances of this case the Income-tax Officer, Central Circle XIV, Calcutta, was competent to file the appeal before the Tribunal against the order of the Appellate Assistant Commissioner of Income Tax Range A, Calcutta?
2. Whether on the facts and circumstances of this case the sum of Rs.2,50,000 represented the surplus on the sale of lands which was the stock in trade of the assessee company or was the value of goodwill alleged to have been transferred?
3. Whether on the facts and circumstances of this case by the sale of the whole business concern it could be held that there was taxable profit in the sum of Rs.2,50,000?
4. Whether on the facts and circumstances of this case and in view of the findings of the Tribunal that the entire share capital of the vendee company (excepting seven ordinary shares) was taken over by the vendor firm in lieu of the sale price of the business as a whole, there was any profit in the amount of Rs.2,50,000 the same being taxable under the Indian Income Tax Act?
2. The relevant facts and circumstances are these. The respondent, M/s. Mugneeram Bangur & Co. (Land Department) Calcutta (hereinafter referred to as the vendors) were a firm carrying on the business of land development in Calcutta. By an agreement dated July 7, 1948, the partners of the firm agreed to sell all the business of the said firm to the Amalgamated Development Limited, hereinafter called the vendee, which company was promoted by the partners of the firm. The relevant paragraphs of the said agreement are as follows:
"And Whereas the Vendors have agreed to sell and the company has agreed to purchase all the said business on the basis hereinafter set out.
Now it is hereby agreed and declared between the parties as follows:
1. The Vendors do hereby agree to sell and the company both hereby agree to purchase. All That the said business with effect from the eight day of July One thousand nine hundred and forty-eight Together with the goodwill of the said business And all stock in trade, fixtures, tools, implements, furniture, fittings and all other articles and things belonging to the said business or in anywise used in the same including the benefit and advantages of all contracts.
2. The purchase price shall be Rupees thirtyfour lakhs ninety nine thousand and three hundred paid and satisfied by the Company allotting to the Vendors or their nominees seventeen thousand five hundred Redeemable Preference shares of Rupees one hundred each and seventeen thousand four hundred and ninetythree Ordinary shares of Rupees one hundred each in the capital of the Company which will be accepted by the Vendors in full satisfaction of the said purchase price.
5. The Company shall undertake and discharge all debts and liabilities of the Vendors including development expenses such as opening out roads, laying out drains and sanitary arrangements providing electricity in the areas and providing a School in Tollygunge for education of Children for which the Vendors have given an undertaking to the Tollygunge Municipality and also the liability of the Vendors in respect of the deposits made with them by various intending purchases of lands but excluding the liabilities of the Vendors for Income tax, Super tax or any other tax or duty on income or revenue in respect of the profits of the business."
3. The sum of Rs.34,99,300 was arrived at in the Schedule thus.
1. Land Rs. 12,68,628 7 7
2. Goodwill Rs. 2,50,000 0 0
3. Motor Car & Lorries Rs. 25,866 8 6
4. Furniture, Fixture, etc. Rs. 5,244 5 6
5. Mortgage secured Rs. 17,62,367 6 0
6. Deposits for purchase of Land Rs. 53,500 0 0
7. Advance paid to pleaders solicitors, contractors stall and other outstandings Rs. 1,83,622 3 6
8. Cas
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