A company is a separate legal entity distinct from its members, and a transaction between a company and its members is a transaction between two separate legal entities.

V.Ramaswami, J.

1. In this case the assesses, Maharajadhiraj of Darbhanga, floated a private limited company called "The Newspapers and Publications Limited" (hereinafter referred to as the Company) having an authorised capital of Rs. 25,00,000.00 made up of 25,000 shares of Rs. 100.00 each. The first paragraph of the Memorandum of Association of the Company states as follows: -

"As a first operation to acquire, purchase, take over or agree to take over by private treaty or in any other lawful manner whosoever as a going concern the undertakings now being carried on under the names and styles of the "Indian Nation" and the Aryavarta newspapers and the Indian Nation Press along with all or any of the stock-in-trade, rights, assets, interests, liabilities and obligations of the said undertakings with all their advantages, goodwill, licenses and privileges as standing on ...... and pay for such rights and privileges in cash or in shares or partly in cash and partly in shares of the company (as may be agreed upon between the parties), and to carry on the said business along with other business mentioned in the other succeeding sub-Clauses of this clause of the Memorandum of Association."

In pursuance of the above object the Company took over with effect from the 30th September, 1948, the business of publication of the two newspapers Indian Nation "Aryavarta as a going concern along with its assets and liabilities. The consideration for the transfer was Rs. 32,50,000/-to be satisfied by the allotment to the Maharajadhiraj of fully paid up shares of the requisite amount. Though a formal deed of sale was not immediately drawn up, the agreement was followed by the actual delivery of possession to the Company of the movable and immovable assets. To place the transaction on a proper basis, a sale deed was executed on the 1st June, 1950, and registered on the 12th August, 1950, on stamp paper of Rs. 8,435/10.00 confirming the transaction which had already been effected on the 30th September, 1948. In consideration of the sale made on the 30th September, 1948, of the business, with its assets and liabilities, the Company passed a resolution on the 6th November, 1948, allotting 12,500 fully paid up shares of Rs. 100/-each to the assessee. The assessee also paid in cash for a further allotment of 12,500 share of Rs. 100.00 each.

As desired by the assessee, however, 24,950 shares were allotted in the name of the assessee himself and the balance of 50 shares was allotted in the names of his nominees as follows: - (1) Raja Bahadur Vishweshara Singh -- 10 shares. (2) Pundit Girindra Mohan Misra -- 10 shares. (3) Kumar Ganganand Singh -- 10 shares, (4) Pundit Vaidyanath Jha -- 10 shares, (5) Mr. G. P. Danby -- 10 shares. The sale-deed dated the 1st June, 1950, recites that the value of the movables was determined after due and proper assessment to be Rs. 8,41,000/ - and the consideration thereof was satisfied by the allotment of 80,410 fully paid up shares of the Company. The machinery and plant of the business were included amongst the movables. As regards the immovable properties, the sale-deed recites that they were valued at Rs. 4,09,000.00 which was satisfied by the allotment of 4,090 shares. According to the records of the assessee, the original cost of the building was Rs. 49,270/-, and the original cost of the machinery and plant was Rs. 2,30,552/-. The written down value of the building on the 3oth September, 1948, was Rs. 29,669/-, and the written down value of the plant and machinery on the same date was Rs. 119,368/-.

Since the value, according to the bale-deed; of the movable and immovable properties was in excess of the written down value, the Income-tax Officer held that the assessee was liable to be taxed on the difference between the two amounts, namely, the sum of Rs. 1,30,785/-, under the second proviso to Section 10 (2) (vii) of the Indian Income-tax Act. The Income-tax Officer also noticed that the assessee himself i