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1967 Supreme(SC) 181
SUPREME COURT OF INDIA
J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI, JJ.
M/s. Killick Nixon and Co., Appellant
Versus
The Commissioner of Income-tax, Bombay City I, Bombay, Respondent.
Civi1 Appeals Nos. 1919 and 1920 of 1966, D/- 5-5-1967.
Advocates Appeared
Mr. S. T. Desai, Senior Advocate, (Mr. O. P. Malhotra, Advocate Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., with him), for Appellant (In C. A. No. 1919 of 1966) and Respondent (In C. A. No. 1920 of 1966), Mr. D. Narsaraju, Senior Advocate, (Mr. R. N. Sachthey, Advocate, with him), for Appellant (In C. A. No. 1920 of 1966) and Respondent (In C. A. No. 1919 of 1966).
D.NARASARAJU, J.B.DADACHAN, O.C.MATHUR, O.P.MALHOTRA, R.N.SACH, S.T.DESAI
Capital gains are not entitled to exemption under S. 25 (3) of the Indian Income-tax Act, 1922, as they are not income earned from trading activity.
Headnote:
INCOME TAX - Capital gains - Exemption under S. 25 (3) of the Indian Income-tax Act, 1922 - Whether capital gains are entitled to exemption under S. 25 (3) - Held, no.
Fact of the Case:
The assessee, a firm, sold its capital assets to two companies in 1948 and made capital gains. The Income-tax Officer assessed the capital gains to tax. The assessee claimed exemption from tax under S. 25 (3) of the Indian Income-tax Act, 1922, on the ground that it had discontinued its business in 1948.
Finding of the Court:
The High Court held that capital gains are not entitled to exemption under S. 25 (3) of the Indian Income-tax Act, 1922, as they are not income earned from trading activity.
Issues: Whether capital gains are entitled to exemption under S. 25 (3) of the Indian Income-tax Act, 1922.
Ratio Decidendi: Capital gains are income within the meaning of S. 2 (6-C) of the Indian Income-tax Act, 1922, but they are not income earned from trading activity. Therefore, they are not entitled to exemption under S. 25 (3) of the Act, which exempts from tax income earned from business which is discontinued.
Final Decision: The appeals of both the assessee and the Commissioner were dismissed.
Judgement
SHAH, J.: These are cross appeals from the order passed by the High Court of Bombay recording answers to questions submitted in a reference under S. 66 of the Indian Income-tax Act, 1922.
2. Messrs. Killick Nixon and Co.-hereinafter called the assessee -was a firm which carried on diverse trading activities in Bombay. The assessee agreed to sell on November 28, 1947 to a Company called "Killick Industries Ltd.", the benefit of managing agency contracts held by it, shares of limited Company (including 240 shares of the Cement Agencies Ltd.) and debentures, and book and other debts in consideration of 79,998 shares of the face value of Rs. 100 each of Killick Industries Ltd., and Rs. 700 in cash. By another agreement, dated January 29, 1948 the assessee agreed to sell to "Killick Nixon and Co., Ltd." goodwill of the business of the assessee, freehold and leasehold hereditaments, plant and machinery, stock in trade and book debts, Government securities and shares and full benefit of all shipping and general agencies, distributorship, etc. in consideration of 9,996 shares in the Vendee Company of the face value of Rs. 100 each and Rs. 400 in cash. The assessee was dissolved and its business was discontinued with effect from February 1, 1948.
3. In a proceeding for assessment to tax payable by the assessee for the year 1949-50 (the relevant previous year being the year ending June 30, 1948) the Income-tax Officer assessed the capital gains made by the assessee, on the transfer of its capital assets to the two Companies, at Rs. 32,01,747. In appeal, the Appellate Assistant Commissioner modified the order. He was of the view that the assessee had made capital gains amounting to Rs. 25,40,737 by sale of shares to the two companies and other assets transferred to Killick Nixon and Co. Ltd., and had suffered a capital loss of Rupees 4,00,530, being the difference between the market value of the managing agencies, 240 shares of the Cement Agencies Ltd. and the goodwill on January 1, 1939 estimated at Rs. 51,40,802 and the market value of those assets on February 1, 1948 estimated at Rs. 47,40,272. Debiting the loss against the capital gains made by sale of shares, the Appellate Assistant Commissioner brought to tax an amount of Rs. 21,06,455. The Appellate Assistant Commissioner rejected the claim of the assessee to the benefit of S. 25 (3) and (4) of the Income-tax Act, 1922. The Appellate Tribunal confirmed the order passed by the Appellate Assistant Commissioner.
4. The Tribunal drew up a statement of the case and referred two questions numbered (1) and (2) below to the High Court of Judicature at Bombay. Two more questions numbered (3) and (4) were submitted pursuant to the order made by the High Court under S. 66 (2) of the Act. The questions were :
"(1) Whether on the facts and circumstances of the case, the assessee firm is entitled to the benefit contained under S. 25 (3) in respect of capital gains assessed to tax under S. 12-B of the Income-tax Act?
(2) Whether on the facts and in the circumstances of the case, the assessee firm liable to pay capital gains in respect of profits and gains arising from the sale of its assets to the limited companies ?
(3) Whether S. 12-B of the Indian Income-tax Act, 1922, at all applied to the applicant s case ?
(4) Whether on the facts and in the circumstances of the case, the Tribunal misdirected itself in law and/or acted without evidence or in disregard of the most material evidence on record in making the valuation of the applicant s assets on first day of January one thousand nine hundred and thirty-nine ?"
5. The High Court answered the first question in the negative, and the second, the third and the fourth questions in the affirmative. The assessee has appealed against the answers recorded on the first three questions; against the order recording the answer on the fourth question, the Commissioner has appealed.
6. The appeal filed by the Commissioner may first be considered. The assess
