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1968 Supreme(Cal) 204
HIGH COURT OF CALCUTTA
S. P. Mitra, Chatterjee
GILLANDERS ARBUTHNOT AND CO. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 101 Of 1966
Decided On : SEPTEMBER 13, 1968
B.L.PAL, D.K.SEN, D.PAL, R.Bajoria
The transfer of investment held by the assessee-company, admission of the company as a partner in the assessee-firm and issue of shares of the company to public constituted a sale in the commercial sense and gave rise to capital gains within the meaning of Section 12b of the Income-tax Act, 1922.
Headnote:
INCOME TAX - Capital gains - Transfer of investment held by assessee-company, admission of company as partner in assessee-firm and issue of shares of company to public - Whether capital gains arose - Computation of capital gains.
Fact of the Case:
The assessee-firm sold certain shares and securities to a limited company and admitted the company as a partner in the firm. The Income-tax Officer found that the capital gain on the sale of the shares and securities was Rs. 75,86,960 and the capital gain on the sale of goodwill was Rs. 27,29,826. The Appellate Assistant Commissioner determined the total value of the shares sold to the limited company to be Rs. 2,04,72,500 and the capital gain was found to be Rs. 70,09,124. The Tribunal found that the total amount of capital gain of the assessee-firm by the transaction aforesaid would be Rs. 46,76,784.
Finding of the Court:
The court held that the transaction was a sale in the commercial sense and that the capital gain on the sale of the shares and securities was Rs. 27,04,272. The court also held that there was no sale of the goodwill so far as the assessee-firm was concerned and that there was no capital gain on the admission of the company as a partner in the assessee-firm.
Issues: 1. Whether the Tribunal was right in holding that the present Government of India was competent to reopen an assessment for the purpose of assessing capital gain and realising the tax in respect of such capital gain which arose prior to August 15, 1947? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the first proviso to Section 12b (2) was not attracted? 3. Whether, on the facts and in the circumstances of the case, any capital gains within the meaning of Section 12b of the Income-tax Act, 1922, could be said to arise by the transaction involving transfer of investment held by the assessee-company, admission of the company as a partner in the assessee-firm and issue of shares of the company to public? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceedings under Section 34 (1) (a) have been validly initiated? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in computing the capital gains at Rs. 46,76,784?
Ratio Decidendi: 1. The court held that the present Government of India was competent to reopen an assessment for the purpose of assessing capital gain and realising the tax in respect of such capital gain which arose prior to August 15, 1947, as the law that would govern the assessee with respect to income, profits or gains earned during any year would be the law as on April 1, 1947. 2. The court held that the first proviso to Section 12b (2) was not attracted as the transfer was effected at a time when Section 12b was not in the statute book. 3. The court held that capital gains within the meaning of Section 12b of the Income-tax Act, 1922, could be said to arise by the transaction involving transfer of investment held by the assessee-company, admission of the company as a partner in the assessee-firm and issue of shares of the company to public, as the transaction was a sale in the commercial sense. 4. The court held that the proceedings under Section 34 (1) (a) were validly initiated as the Income-tax Officer had the authority to issue a notice under the old Section 34 even if it was repealed and even if the amendment came into force on the relevant date. 5. The court held that the Tribunal was not justified in law in computing the capital gains at Rs. 46,76,784, as the capital gain on the sale of the shares and securities was Rs. 27,04,272 and there was no capital gain on the admission of the company as a partner in the assessee-firm.
Final Decision: The court answered question No. 1 in the affirmative, question No. 2 in the affirmative, question No. 3 in the affirmative, so far as the transfer of investments, and in the negative so far as the admission of the company as a partner in the assessee-firm, question No. 4 in the affirmative, question No. 5 in the negative and held that the capital gain was Rs. 27,04,772.
( 1 ) THIS is a reference under Section 66 (1) of the Indian Income-tax Act, 1922, The assessee is a firm. Till the end of February, 1947, the firm consisted of four partners. Under a deed of partnership, dated February 28, 1947, Messrs. Gillanders Arbuthnot and Co. Ltd. was admitted into the partnership. This company was floated in 1935 ; but it did little business. The said limited company purchased from the then partners of the assessee-firm certain specified shares and securities of the assessee-firm for a sum of Rs. 75,00,000 ; on payment of a further sum of Rs. 14,90,000 the said limited company was admitted as a partner of the firm, the shares of the company in the goodwill and in the profits of the firm being 99%, The partners of the firm and the shareholders of the company were the same.
( 2 ) THE aforesaid sum was agreed to be satisfied by allotment of 64,900 ordinary shares of Rs. 100 each, to the then partners and a further allotment of 25,000 redeemable, cumulative and preferential shares of Rs. 100 each to the said the then partners, vendors,
( 3 ) THE firm was originally assessed with respect to its income for the year 1947-48 on August 28, 1948. About one year before the said order, the deed of partnership admitting the limited company as a partner was registered with the income-tax department on August 8, 1917. The original assessment proceeding was "with respect to the year ending on March 31, 1947. No assessment was made with regard to capital gain, if any, made by the assessee-firm by the said sale to the limited company. Hereafter, the phrase "the limited company" would mean "gillanders Arbuthnot and Co. Ltd. ", and the phrase "assessee-firm" would learn the assessee-firm, Messrs. Gillanders Arbuthnot and Co.
( 4 ) SUBSEQUENTLY, a notice under Section 34 (1) (a) was issued on May 2, 1949, to reopen the said assessment for the year 1947-48, as capital gain to the firm by the sale aforesaid escaped taxation.
( 5 ) BEFORE the Income-tax Officer the assessee-firm appeared through its representatives. The assessee-firm also filed a return showing the same income as it was assessed originally and further submitted that the assessee-firm by the said transaction made no gain ; on the other hand there was a loss.
( 6 ) THE Income-tax Officer found that the consideration for the sale of the securities by the firm was really Rs. 1,23,82,688, which was considered to be the market value of the shares and securities which the firm sold. That figure was obtained from the prospectus of the limited company aforesaid. The Income-tax Officer further found that there was a direct connection between the buyer and seller. Therefore, the sale was effected at a lower price with the object of reducing the liability to capital gains tax. He also found that the actual cost of the shares and securities was Rs. 47,75,988 on January 1, 1939. The Income-tax Officer finally found that the capital gain on the sale of the shares and securities was Rs. 75,86,960. The Income-tax Officer further found that the value of goodwill should be valued at Rs. 1,13,97,474 on the date of sale and the actual cost of the goodwill on January 1, 1939, was Rs. 86,67,648. Hence, he found a total capital gain of Rs. 1,03,16,768, the gain by the sale of goodwill being Rs. 27,29,826.
( 7 ) AGAINST this order there was an appeal to the appellate authority and the first objection of the assessee was that levying of capital gain was "ultra vires" the Constitution and further that the Government of India, as it was constituted on relevant dates, could not collect tax in respect of gains or profits which accrued due before August 15, 1947. It was further urged that the notice under Section 34 should have no retrospective effect in respect of income earned prior to August 15, 1947, and that the amended Section 34, as in 1948, had no retrospective effect. The first objection was overruled by the Assistant Commissioner on the basis of the decision of
