Judgment

SHAH, J.:- The respondents - a firm which carries on the business of manufacturing, purchasing and selling cloth closed its manufacturing side of the business and transferred its machinery to a private limited company in the share capital of which the partners of the firm had the same interest as they had in the assets and profits of the partnership. In the assessment year 1959-60 the Income-tax Officer, Surat, brought to tax under Section 10 (2) (vii) proviso (ii) of the Income-tax Act, 1922, Rs. 40,743/- being the excess realised over the written down value of the machinery. But the Income-tax Appellate Tribunal held, relying upon the decisions in Commissioner of Income-tax v. Sir Homi Mehta s Executors, 28 ITR 928; Rogers & Co. v. Commissioner of Income-tax, 34 ITR 336; and Commissioner of Income-tax v. Mugneeram Bangur & Co., (1963) 47 ITR 565 (Cal) that the firm "transferred the machinery only with a view to carry on the business as a company rather than as a firm", and by that transfer no profit in a business sense could be deem to have resulted to the firm.

2. The following question referred by the Tribunal:

"Whether, on the facts and in the circumstances of the case, the sum of Rs. 40,743/- is assessable to tax by applying second proviso to Section 10 (2) (vii) of the Indian Income-tax Act, 1922?", was answered by the High Court of Gujarat in the negative. The Commissioner of Income-tax appeals with certificate of fitness granted by the High Court.

3. Counsel for the Commissioner contended that the decisions in Sir Homi Mehta s Executors case, 28 ITR 928; Rogers & Company case, 34 ITR 336 and Mugneeram Bangur s & Company s case, (1963) 47 ITR 565 (Cal) on which the Tribunal and the High Court relied are inconsistent with the judgments of this Court. He submitted that the assessee could not in a case falling within the 2nd proviso to Section 10 (2) (vii) of the Income-tax Act, 1922, avoid liability to be taxed in respect of the excess realized over the written down value of the machinery sold by the firm on the plea that the "substance of the transaction" which resulted in transfer of the rights of the firm to the company was of the nature of a step to readjust the business relations of the partners inter se.

4. In Sir Homi Mehta s Executors case, 28 ITR 928 a group of individuals who were carrying on business in shares transferred their holding of shares in several joint stock companies to a private limited company formed by them and entered in the books of the company the price of the shares ruling in the market on the date of the commencement of its business. The market value of the shares was in excess of the cost to the transferors. It was held that no profit may in law be said to have resulted, for the true result of the transfer of the shares was only that instead of the shares being jointly held as individuals they were held by those very persons as a limited company---a procedure adopted merely for readjustment of their business position as holders of the shares in the various companies. In Rogers & Company s case, 34 ITR 336 the Bombay High Court held that where partners of a trading firm were allotted shares in a private limited company floated by them in the same proportion as the shares they held in the assets of the firm transferred to the company, excess of price for which the assets were sold over the written down value of the assets could not be brought to tax under Section 10 (2) (vii) Proviso (ii) of the Income-tax Act, 1922. In the view of the High Court transfer of assets of the firm to the company did not amount to sale within the meaning of Section 10 (2) (vii) Proviso (ii). The High Court observed at p. 339:

"But in all transactions which come up for consideration in a taxing statute we have to look at the real nature of the transaction; we have not to look at the form - the legal form - which a transaction has: an when we look at the real nature of the transaction before us, although legally