Case Note & Summary
The dispute arose in income-tax assessment proceedings for the account year 1952-53 concerning a transfer of assets by one private limited company to another. The appellant company, M/s. Associated Clothiers Ltd., was originally registered as Phelps & Company Ltd. on September 30, 1939. On March 21, 1952, its name was changed under Section 11(4) of the Indian Companies Act, 1913, and on the same day a new company, M/s. Phelps & Co. Ltd., was incorporated. By a written agreement also dated March 21, 1952, the appellant company agreed to transfer its assets and liabilities to the new company in consideration of cash of Rs. 23,291/10/5, allotment of shares worth Rs. 12,30,000, and the taking over of liabilities aggregating Rs. 6,05,601/6. Among the transferred properties was a building at Connaught Place, New Delhi, shown in the second schedule to the agreement with an original cost of Rs. 97,258 and a written down value of Rs. 57,011 after depreciation. The building was valued in the agreement at Rs. 2,24,673. The Income-tax Officer brought to tax under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922, the difference of Rs. 40,247 between the original cost and the written down value as deemed profit. The Income-tax Appellate Tribunal held in favour of the assessee, relying on Sir Homi Mehta's Executors' case, and held that the sale was 'in substance to self' so no profit arose. The Commissioner of Income-tax obtained a reference to the Calcutta High Court, which answered the question in favour of the Revenue. The High Court held that the transfer was between two distinct corporate entities, not a transfer to self, and that the doctrine of lifting the corporate veil had only limited application. It also observed that the two companies continued to exist side by side for many years, although this observation was based on evidence not on record. The appellant appealed to the Supreme Court by certificate under Section 66A(2). The Supreme Court first noted that the High Court had erred in relying on additional evidence not before the Tribunal, as a reference under Section 66 is limited to the Tribunal's findings. It also rejected the appellant's argument that only a part of the undertaking had been transferred, accepting the Tribunal's statement of case that all assets and liabilities were transferred. On merits, the Supreme Court distinguished Sir Homi Mehta's Executors and Rogers & Co., where there was a readjustment of business position by individuals or partners forming a company. Here, two separate companies existed from the transaction's inception, and the sale was for a stated consideration which was not shown to be notional. The consideration exceeded the original cost, so the excess over written down value up to original cost was profit under the second proviso to Section 10(2)(vii). The Court relied on Chittoor Motor Transport Co. (P) Ltd. v. Income-tax Officer and referred to Bank of Chettinad Ltd. v. Commissioner of Income-tax, Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, and Doughty v. Commissioner of Taxes on the limit of the substance-over-form doctrine. The appeal was dismissed, and the High Court's decision was affirmed.
Headnote
A) Income Tax - Deemed Profit on Sale of Asset - Second Proviso to Section 10(2)(vii) - Indian Income-tax Act, 1922, Section 10(2)(vii) - Transfer of a building by appellant private limited company to another newly incorporated private limited company for a stated consideration exceeding written down value was held taxable; since the sale was between distinct corporate entities and not a case of persons carrying on business readjusting their position, the difference between original cost and written down value was deemed profit. Held that the sale was not 'in substance to self' and the second proviso applied. (Paras Not mentioned) B) Corporate Law - Lifting of Corporate Veil - Tax Avoidance/Readjustment - Indian Income-tax Act, 1922, Section 10(2)(vii) - The doctrine of ignoring corporate personality has only limited application; where two companies continued to exist as separate legal entities, transfer of assets by one to the other cannot be treated as transfer to self merely because shareholders may be same. The court distinguished Sir Homi Mehta's Executors and Rogers & Co. which involved readjustment of business positions by individuals/partners, not two existing companies. Held that corporate veil cannot be lifted in this case. (Paras Not mentioned) C) Income Tax Procedure - Reference to High Court - Powers under Section 66 - Indian Income-tax Act, 1922, Sections 66(1), 66(2) - High Court in a reference is bound by findings of the Appellate Tribunal; it cannot admit additional evidence or rely on material not before the Tribunal. The High Court's observation that companies continued to exist side by side for many years was based on evidence not on record; such approach was erroneous, but final decision upheld on substantive grounds. Held that High Court should proceed on Tribunal record. (Paras Not mentioned) D) Income Tax Assessment - Transfer of All Assets - Statement of Case Binding - Indian Income-tax Act, 1922, Section 66 - The Tribunal's statement of case recorded that all assets and liabilities were transferred; appellant's attempt to rely on recital 'part of undertaking' did not override that finding, especially as no objection was raised earlier. Held that Supreme Court must accept statement of case as to all assets transferred. (Paras Not mentioned)
Issue of Consideration
Whether the sum of Rs. 40,247 could be deemed to be profits of the assessee company under second proviso to s.10(2)(vii) of the Indian Income-tax Act, 1922 on transfer of a building to another company, and whether the sale was 'in substance to self' so as to be outside the provision.
Final Decision
Supreme Court dismissed the appeal, affirmed the High Court, held that the sale was by one company to another, not in substance to self, and the difference between original cost and written down value was taxable profit under second proviso to Section 10(2)(vii) of Indian Income-tax Act, 1922.
Law Points
- Legal points not extracted
- A sale between distinct corporate entities is not a transfer in substance to self
- corporate veil cannot be lifted merely to avoid tax
- second proviso to section 10(2)(vii) deems excess over written down value up to original cost as profit on sale of assets
- High Court in reference cannot admit additional evidence beyond Tribunal record
