Lord Phillimore. -

This is an appeal from the judgment of the Court of Appeal of New Zealand reversing the decision of Stout, C. J., on an application by the Commissioner of Taxes seeking to assess the appellant to income-tax in the sum of £6,010 in respect of income for the year ending on March 31st, 1921.

On the proceedings taken in respect of this assessment a case was stated by the Commissioner which, according to the practice in New Zealand, was traversable and was accordingly traversed by the present appellant in his answer, and the matter came in the first instance before a Magistrate and was decided in favour of the Commissioner. His decision was, however, appealable both on grounds of fact and law to a Judge of the High Court, in this case Stout, C. J. The decision of the C. J. is final on fact, but not on a matter of law.

The circumstances are these: The appellant and one Arthur John George carried on business at Wellington as wholesale soft goods merchants and drapers in partnership. On the 25th June 1920 they converted their partnership into a private limited company, of which they were the only two shareholders. The company had a nominal capital of £175,000 in £1 shares 100,000 of which were ordinary, 25,000 were A preference shares and 50,000 were B preference shares.

The arrangement, which was embodied in an agreement dated 25th June 1920 was that the partners as vendors should sell to the company and the company should purchase as from 20th January then past, the goodwill of the business, the leaseholds, plant, machinery, book debts, the benefit of pending contracts, all cash bills and notes, and generally all property to which the vendors were entitled in connexion with the business.

Part of the consideration for the sale was the allotment to the vendors of £76,000 paid-up shares, £30,000 ordinary shares to George and £30,000 to the appellant, and £16,000 B preference shares to George. The residue of the consideration was the undertaking by the company to satisfy all the liabilities and engagements of the firm.

The vendors contracted not to carry on the business of a draper independently of the company, and they stated that they had in certain proportions subscribed the Memorandum of Association for all the 175,000 shares in the company, each thus according to his proportion rendering himself liable to that extent for the debts of the company.

The last balance sheet of the old partnership stood as follows :

Liabilities £ s. d.

Capital account ... 48,774 12 0

Sundry creditors ... 10,366 17 5

Deposits at interest ... 2,238 7 6

Bills payable current ... 36,053 12 2

________________

£97,433 1 9

________________

Assets £ s. d

Furniture and fittings ... 513 18 4

Cash at bank ... 106 11 3

Cash on hand and customs ... 432 7 11

Sundry debtors ... 45,151 17 0

Bills receivable current ... 5,896 3 3

War loans ... 1,974 12 6

Stock in hand ... 43,357 18 10

________________

£97,433 9 1

________________

This should be corrected in one respect as £7,800 was due for unpaid income tax, thereby reducing the capital account from £48,774 12s. 0d. to £40,974 12s. 0d.

The partners having fixed the pries at which they sold, if it could be called a sale, their business to the company, it remained to adjust the figures on the last balance sheet in accordance with this arrangement, £76,000 being evidently more than the sum standing to the credit of the capital account; and, in order to effect this, the item on the asset side "stock in hand £43,357 18s. 10d. "was replaced by an item "stock and goodwill £78, 383 6s 10d."

It appears from the evidence of the accountant who made out these accounts that he suggested that the figure for goodwill might be taken as £20,000, and that this view was accepted by the outgoing partners. This left as the residue of the item £58,383-6-10, or £15,025-8-0, as the difference between the value of the stock-in-trade as shown in the partners's last balance sheet and the value of the stock-in-trade as it might be deemed to be taken over b