Case Note & Summary
The dispute arose out of income-tax assessment of a firm engaged in land development in Calcutta. The assessee firm, Mugneeram Bangur & Co. (Land Department), sold its entire business as a going concern to Amalgamated Development Limited, a company promoted by the same partners, under an agreement dated July 7, 1948. The purchase price was Rs 34,99,300, satisfied by allotment of 17,500 Redeemable Preference shares and 17,493 Ordinary shares of Rs 100 each to the vendors or their nominees. The agreement's schedule separately listed values for various assets including land at Rs 12,68,628, goodwill at Rs 2,50,000, and other items. The Income Tax Officer treated the amount shown as goodwill as taxable profit from sale of stock-in-trade, contending that the firm's business was purely buying and selling land. The Appellate Assistant Commissioner held the amount was goodwill and capital gain not taxable. The Income Tax Appellate Tribunal held the sale was of a going concern but that profit on stock could be traced and was taxable; however, it dismissed the appeal on the ground that the transaction was a mere adjustment among partners. The Calcutta High Court, in a reference under Section 66 of the Indian Income-tax Act, 1922, answered question 4 in favour of the assessee, holding there was no profit because the entire business was transferred to a limited company controlled by the same partners, and that Rs 2,50,000 represented surplus on land but was not taxable. The Revenue appealed to the Supreme Court by special leave. The Supreme Court focused on question 3: whether by the sale of the whole business concern there was taxable profit in the sum of Rs 2,50,000. The Court held that the sale was of the whole concern as a going concern and no part of the slump price was attributable to the cost of land. It applied Doughty v. Commissioner of Taxes and Commissioner of Income-tax, Kerala v. West Coast Chemical and Industries Ltd. The Court reasoned that in a business of buying, developing and selling land, a realisation sale of the whole concern is distinguishable from an ordinary trading sale. The mere fact that the schedule stated a value for land did not lead to the conclusion that part of the slump price was attributable to land, especially absent evidence of valuation of land on the date of sale. Since the company was constituted by the assessees themselves, no effort would ordinarily be made to evaluate land as on the date of sale. Therefore, no part of the slump price was taxable. The Court did not need to answer the other questions, including the competence of the Income-tax Officer to file appeal, which had been given up. The appeal was dismissed, and the decision was in favour of the assessee.
Headnote
A) Income Tax - Sale of Going Concern - Slump Price Not Taxable - Indian Income-tax Act, 1922 - The assessee firm sold its entire land development business as a going concern to a company promoted by its partners for a slump price of Rs 34,99,300 satisfied by allotment of shares. The Revenue sought to tax Rs 2,50,000 shown as goodwill as profit from sale of stock-in-trade. The Supreme Court held that the sale was of the whole concern and no part of the slump price was attributable to the cost of land; therefore no part was taxable. Applied Commissioner of Income-tax, Kerala v. West Coast Chemical and Industries Ltd. and Doughty v. Commissioner of Taxes. Held that a realisation sale of the whole business cannot be split to tax part of the price (Pages 617-618). B) Income Tax - Valuation of Stock-in-Trade - Realisation Sale vs Trading Sale - Indian Income-tax Act, 1922 - In a business of buying land, developing it and selling it, a sale of the entire concern as a going concern is distinguishable from an ordinary trading sale. The mere fact that the sale agreement's schedule stated a value for land did not lead to the conclusion that part of the slump price was attributable to land; there was no evidence of evaluation of land on the date of sale. Because the company was formed by the assessees themselves, no effort would ordinarily be made to evaluate land as on the date of sale. Held that no profit arose from the sale of stock-in-trade (Page 618). C) Income Tax - Reference to High Court - Section 66 Indian Income-tax Act, 1922 - The High Court answered question 4 in favour of the assessee and held no taxable profit due to the transfer of business to a company controlled by the same partners. The Supreme Court did not need to decide the other questions including the competence of the Income-tax Officer to file appeal, which was given up. Held that since question 3 was answered in favour of the vendors, other questions need not be dealt with (Pages 616-617).
Issue of Consideration
Whether sale of entire business as a going concern to a company promoted by the assessee's partners gave rise to taxable profit; whether Rs 2,50,000 shown as goodwill was attributable to stock-in-trade; whether the Income-tax Officer was competent to file appeal before the Tribunal.
Final Decision
Appeal dismissed. Supreme Court held that sale of the whole business as a going concern did not give rise to taxable profit; no part of the slump price was attributable to stock-in-trade. The amount of Rs 2,50,000 was not taxable. Other questions were not answered.
Law Points
- sale of going concern not taxable
- slump price not apportionable to stock-in-trade
- realisation sale distinguished from trading sale
- mere itemization in agreement does not attribute price to land
- no taxable profit from transfer of entire business to company controlled by same persons
