COMMISSIONER OF INCOME-TAX, EAST PAKISTAN, DACCA Versus A. K. KHAN PLYWOOD CO., CHITTAGONG

1. A. S. CHOWDHURY, J. ‑‑The following question has been referred to us by the Income‑tax Appellate Tribunal under section 66(1) of the Income‑tax Act (hereinafter called the Act) for opinion:‑

2. "Whether on the facts and in the circumstances of the case the transaction effected between the firm of Messrs A. K. Khan Plywood Co. and the private Limited company was a sale within the meaning of second proviso to section 10(2)(vii) of the Income‑tax Act and the resulting profit therefrom was liable to tax?"

3. The assessee in the case is a partnership firm called Messrs A. K. Khan Plywood Co. (hereinafter called the "firm") which consisted of two partners, namely, A. K. Khan and his wife Begum Shamshunnahar Khan in equal share. The firm carried on business of manufacture and sale of plywood, tea and tea‑chest, etc. In April, 1957, another private limited company was formed under the name and style of Messrs A. K. Khan Plywood Co. Ltd. (hereinafter called the Company) and it also consisted of the two self?same persons Mr. A. K. Khan and his wife Begum Samshunnahar Khan. In the statement of the case in its reference to his Court, the Tribunal stated: "The running business of the firm together with all its assets and liabilities were sold by the firm to Messrs A. K. Khan Plywood Company Ltd. on the 30th June. 1957, and actual possession was taken over by the private limited company on 1st July, 1957". The firm submitted its return for the assessment year 1958‑1959 whereupon the Income‑tax Officer assessed its total income at Rs. 2,72,955, including Rs. 2,13,349, which was deemed to be profits of the assessee firm under second proviso to section 10(2)(vii) of the Act. The said profit of Rs. 2,13,349 was worked out thus: The original cost of assets was shown in the return at Rs. 5,89,316. A sum of Rs. 2,13,349, was allowed as depreciation of the assets and the written down value therefore was Rs. 3,75,967, Gut the price of the assets of the firm transferred to the said company was shown at Rs. 5,89,316, i.e. at the original cost of the assets. Balance of profit would therefore be Rs. 2,13,349. On a reference to the agreement for sale, the Tribunal found that the assets of the firm were sold to the Company at Rs. 5,89,316. It further found that the firm made a profit of Rs. 2,13,349. It was, therefore, held by the Income‑tax Officer that the assessee was liable to pay tax on the said amount under section 10(2)(vii) of the Income‑tax Act. The assessee preferred a direct appeal to the Tribunal which however disagreed with the conclusion reached by the Income‑tax Officer and held that the inclusion of profit of Rs. 2,13,349, under sec?tion 10(2)(vii) was not tenable in law. On a prayer by the Department for reference of the matter to this Court, the Tribunal referred the question quoted at the outset.

4. In reaching the conclusion as stated above, the Tribunal was guided by a decision of the Bombay High Court in the case of Rogers, & Co. v. Commis?sioner of Income‑tax, Bombay City II 34 ITR 336. In that case it was held that although it could be legally called a sale but substantially it was a reassess?ment and as such the profit thus earned by the firm was not taxable under section 10(2) (vii) of the Act. That case really supports the contention of the assessee. In that case also the partners of a firm formed themselves into a private limited company. The written down value of the assets transferred to the Company was Rs. 3,81,848 but they were sold to the company at the original cost of Rs. 4,85,354. The question was, as in the present case, as to whether the difference between the two was liable to Income‑tax under the second proviso to section 10(1)(vii) of the Act.

5. In the case referred to us the facts as already noticed clearly show that its assets to the company of the same name, the firm sold all the partners of the firm and the shareholders of the company being identical. The original value of the assets of the firm was declared by the assessee as Rs.5,89,316 and the depreciation was allowed thereon for the amount of Rs. 2,13,349. The value of the same assets when sold to the company was again shown as Rs. 5,89,316, at value apparently to be able to claim depreciation on the said assets on the basis of its original value. In other words, the firm got exemp?tion from taxation on account of depreciation, valued the assets of the new company at its original price and thereby definitely made a profit of Rs. 2,13,349.

6. We have to consider if a transaction such as this would be a "sale", within the meaning of section 10(2)(vii) of the Act. The material part of this section is as follows: ‑

7. "1. The tax shall be payable by an assessee under the head (Profits and gains of business, profession or vocation) in respect of the profits or gains of any (business, profession or vocation) carried on by him.

2. (Subject to the provisions of this Act), such profits or gains shall be computed after making the following allowances, namely: ‑

(vii) in respect of any such building, machinery or plant which has been sold, transferred by way of exchange, or is compulsorily acquired by a competent authority under any law for time being in force, or discarded or demolished or destroyed in the previous year, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant is actually sold, transferred or compulsorily acquired as the case may be, or its scrap value:

8. Provided that such amount is actually written off in cite books of the assessee:

9. ???????????

10. Provided further that where the amount for which such building, machinery or plant is sold, transferred or compulsorily acquired, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale, transfer or compulsory acquisition, as the case may be, took place . . . ."

11. On reading of the provision as quoted above, it appears to us that if a firm sells its assets to another company the vendor is liable to pay Income?tax for the difference between the written down value on the date of the sale, and the price at which the assets are actually sold, that is, the profits earned by it, even if the partners of the firm are identical.

12. Mr. Afzalul Haque, the learned Advocate appearing for the Commissioner of Income‑tax submits that in the facts and circumstances of this case, the firm has sold all its assets to the Company which has a separate legal entity and the firm itself has shown a profit. That being so, the firm is liable to assessment.

13. Mr. Md. Nurul Haque, learned Advocate for the assessee however submits that it is not a sale within the meaning of section 10(2)(vii) of the Act as it is merely a transformation into a different Company.

14. On a reference to the paper book it is found that the Tribunal in its statement of the case says that the running business of the firm together with all its assets and liabilities were sold by the firm to Messrs A. K. Khan Plywood Co. Ltd. In its judgment disposing the appeal, it observed: "The transfer or the sale of the assets of the firm were thus effective from 1‑7‑1957." Moreover, it appears that the argument on behalf of the assessee before the Tribunal proceeded on the footing that there was a "sale" but the partners of the firm and the shareholders of the Company being identical it is not taxable in the terms of section 10(21(vii).

15. The Tribunal has also found that the partners of the firm as well as the shareholders of the Company were identical, but it took the view that it was not a "sale" within the meaning of section 10(2)(vii) of the Act.

16. On the facts found, the only question that now remains for considera?tion is whether such a sale can be brought within the mischief of sec?tion 10(2)(vii) of the Act. It was argued before the Tribunal and repeated before us that although it was a sale, in substance the assets remained in the hands of the same set of persons as such it was not a sale within the meaning of section 10(2)(vii) of the Act.

17. Subsection (1) of section 10 provides that an assessee is liable to pay tax in respect of profits or gains of any business. On the facts found we have notified that the firm has earned a profit by sale of its assets as the price exceeds the written down value of the said assets.

18. Now the question is if such a sale comes within the 2nd proviso to clause (vii) of section 10. We find in the said proviso the word used is "sold". There is no provision to the effect that if there is a sale from: one set of persons to another, profits earned thereon, would not be liable to taxation. As a matter of fact, even in Roger's case referred to above, it was held that in the eye of law it was a sale and the assets were transferred to a different company having separate legal entity, but Chagla. C. J. was of the view that since substantially it remained in the same hands, there was no sale within the meaning of this section. With respect we are unable to read any exception in the Second proviso to clause (vii) of section 10 to the effect that if the property remains in the same hands, it will riot be a sale within the meaning of this section. If there is a sale in the eye of la and if a profit results therefrom, the firm making such profit is liable t taxation. The Legislature has expressed its intention in clear terms and, a such, speaking again with respect, we are of opinion that there is no such exception in the said proviso. The intention of the Legislature must be given effect to and while interpreting a provision of a statute a Court of law cannot legislate on the subject. It has merely to declare such intention of the Legislature as it can be gathered from the words employed by it in expressing its intention. We entertain no doubt in our mind that there is no ambiguity whatsoever and we are not permitted to read into the proviso any words which are not there.

19. The view taken by us finds full support in a Division Bench decision of another Indian High Court in the case of Maharjadhiraj Sir Kameshwar Singh v. Commissioner of Income‑tax, Bihar & Orissa 48 I T R 483. In that case, the learned Chief Justice of the Patna High Court who delivered the judgment of the Court discussed at length the decision of the Bombay High Court and observed that the assessee, though he was the owner of all the shares in the company; cannot claim to be treated as if he were identical with the company in order to promote his own benefit or advantage. The assessee and the Company were distinct legal entities and the sum in question was rightly assessed to Income‑tax. Expressing its dissent from the view of the Bombay High' Court the Patna High Court observed that if the legal entity was different the principle that the vendor cannot make profit out of himself was not applicable at all. Ramaswami, C. J. observed as follows: ‑

20. "From the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and of being subjected to the duties which are not the same as those enjoyed or borne by its members."

21. Mr. Nurul Haque has relied on the case of Doughty v. Commissioner of Taxes 1927 A C 327, in support of his contention. That case was also considered in the Patna case and it was found that the facts of that case were distinguish?able from the Patna case. That case is also distinguishable from the facts of the case before us, for, it has been found by the learned Judges of the Patna High Court that "upon the facts Lord Phillomore held the view that it was a 'lump transaction' and no sum could be pitched upon as the actual Price of the stock. It is manifest that in the‑present case there is no question of any 'slump transaction' and the principal laid down therein has no application". This observation fully applies to the facts of: the case before us.

22. Mr. Nurul Haque also referred to a decision reported in A I R 1965 Mad. 398. That case also has no application to the facts of this case. That was a case under section 3 of the Income‑tax and the facts were vastly different from the one before us. He also made a reference to 49 I T R 927. That case merely accepted the view of the Bombay High Court with which we have expressed out, dissent for the reasons already stated above.

23. Mr. Afzalul Plaque in support of his contention has referred to a decision in the case of In re: Exchange Banking Company, called Flit croft's case (1882) 21 Ch. D 519. In that case it was held by Bacon V. C. that the sale that has been effected by the assessee was a sale to a different legal entity.

24. For the reasons stated above, we are of opinion that the reference shall be answered in the affirmative.

25. K. M. HASAN, J.‑- I agree.

26. Reference answered in the affirmative.