H. R. KHANNA, C. J.

( 1 ) FOLLOWING question has been REFERRED TO to this Court under section 66 (1) of the Indian Income-tax Act, 1922 (hereinafter REFERRED TO to as the Act) :-

"whether the sum of Rs. 83,624. 00 was rightly assessed under section 12b of the Indian Income-tax Act, 1922?"

( 2 ) THE case relates to assessment year 1947-48, the previous year for which ended on March 1, 1947. The assessee is an individual who was carrying on business under the name and style of Mumick Opticians at Connaught Place, New Delhi. A private limited company called "mumick Limited" (hereinafter REFERRED TO to as the Company) was incorporated with the assessee as its Managing Director to take over the said business. An agreement to that effect was entered into between the said Company and the assessee on September 16, 1946- The nominal capital of the Company was Rs. 5 lakhs divided into 5000 ordinary shares of Rs. 100. 00 each. Clauses I and 2 of the agreement read as under :-

"1. The Vendor sells and the Company purchases :

FIRST the goodwill of the said business (with the exclusive right to carry on the business under the name and style of Mumik and represent the company as carrying on such business in continuation of the Vendor firm and in succession thereto, and right to use any word or words indicating that the business is carried on in continuation of or succession to the said firm) and all trade works connected therewith.

SECONDLY all the plant, machinery tools, licenses, stores, furniture to which the vendor is entitled in connection with the said business, as specified in the first schedule hereto.

THIRDLY the full benefit of all pending contracts, engagement and orders in connection with the said business as well as the book debts amounting to Rs. 3,006/12- more fully described in the second schedule attached to this agreement.

FOURTHLY cash balances of the business as on 31. 8. 46 Rs. 1,164/12- and balance with Punjab National Bank Ltd. , New Delhi as on 31. 8. 46 amounting to Rs. 3,707/15/9.

LASTLY all other property to which the vendor is entitled in connection with this business.

"2. The consideration of the said sale is Rs. 1,17,341/15/9 which is to be paid or satisfied as follows :-

(A) By payment of Rs. 1,959/11/6 out of the above amount to the creditors of the vendor, more fully described in the third schedule attached to this agreement.

(B) By allotment of 1150 shares of Rs. 100. 00 each fully. . . . up in the share capital of the Company.

(C) By payment of Rs. 341/15/9 in cash to the Vendor. "

( 3 ) THE assets of the business of the assessee, viz. machinery, furniture,. stock and goodwill, were valued at Rs- 1,26,000. The Company in that connection issued 1260 shares of Rs. 100. 00 each to the assessee and his nominees as under :-

( 4 ) THE Income-tax Officer held that there was a capital gain of Rs. 83,624. 00 in the hand of the assessee and taxed him as such. In this connection it was observed :

"the assets were acquired by the Company, not at book value, but at an enhanced price. Machinery valued at Rs. 14,032. 00 in the balance sheet on 31-8-46 was acquired at a value of Rs. 40,434. 00. Similarly furniture valued at Rs. 2,353. 00 was acquired at a value of Rs. 9,575. 00. The Stocks were acquired at book value. The company also paid Rs. 50,000. 00 as good-will which did not exist in the books previously. "

( 5 ) ON appeal the Appellate Assistant Commissioner held that "the maximum amount of Capital Gains which could be included in the assessment would have to be limited to the proportionate burden of the profit which had fallen on the outsider, namely, B. P. Mitra, who had contributed 10 shares. " The department filed an appeal to the Income-tax Tribunal. The Tribunal was of the view that the following fundamental question was involved :

"when a person, who carried on a proprietary business, converts it into a limited company and receives shares in lieu of the business assets transferred for an enhanced valuation, can it be

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