I.T. AS. NOS. 1991 (LB) AND 1992 (L B) OF 1991-82, DECIDED ON 25TH JUNE, 1983. Versus I.T. AS. NOS. 1991 (LB) AND 1992 (L B) OF 1991-82, DECIDED ON 25TH JUNE, 1983.
ORDER
MUHAMMAD MAZHAR ALI (CHAIRMAN).‑ These appeals relating to charge years 1977‑78 and i978‑79, have been brought at the instance of assessee, a private Ltd. Co., against the combined order of the learned C. I. T. (Appeals), Zone‑11, Rawalpindi, dated 8th October, 1981. The assessee's appeal to the learned Appellate Assistant Commissioner for the charge year 1977‑78, was admitted to be time‑barred by five days. A request made on its behalf for condonation of delay on the ground of illness of the Managing Director, Mr. M. T. bas been turned down by the first appellate authority and, consequently, the appeal has been dismissed, in limine, being time‑barred. It may be nosed that a medical certificate from a private medical practitioner advising Mr. M. T. rest for five weeks from 9‑10‑1979, was also submitted before the first appellate authority. The learned Commissioner observed : "the illness of Managing Director does not present the Co., from a filing of appeal and strangely brought this certificate is also by Mr. M. T , who is supposed to be ill.
2. Mr. Faruq Ali, the learned Authorised Representative of the appellant submitted that as a matter of fact the appellant‑Company having gone in voluntary liquidation with effect from 31st July, 1979, as per resolution of the Board of Directors, stood dissolved on the said date Mr. M. T. was by virtue of the said resolution appointed as Liquidator. The counsel submitted that the Resolution had been duly published, as required, by law, in the Gazette of Punjab, dated 8th August, 1979. He further submitted that the Demand Notice was served on 10th August, 1979, in the office of the appellant‑Company (under liquidation) when the liquidator was actually unable to attend to his duties as a liquidator on account of his illness with effect from 9th October, 1979. The learned counsel emphasised that while holding that the appellant had failed to show sufficient cause for determina tion of delay, the learned Commissioner of Income‑tax failed to take Dote of these relevant facts which were unfortunately not properly placed before him. According to him, the decision for filing of an appeal against the assessment for the charge year 1977‑78 was to be taken by the Liquidator since the Board of Directors had already stood dissolved after the passing of tire Resolution for voluntary winding up of the company. The learned Depart mental Representative vehemently urged that the mere illness of the Manag ing Director could not prevent the company from filing the appeal through some principal officer. He also maintained that assessment proceedings for the charge year 1978‑79, were duly attended to on behalf of the appellant before the Income‑tax Officer on various dates from 15th October, 1979 to 22nd October, 1979 and hence the appeal for the charge year 1977‑78, dated also be filed within time. A perusal of the order‑sheet entries dated 15‑10‑1979 and 22‑10‑1979 for the charge year 1978‑79, clearly indicates that Mr. M. T. never personally attended the assessment proceedings before the income‑tax Officer and that the company was represented by its Autho rised Representative individually or with accountant of the company. The argument of the learned Departmental Representative is therefore, of no sub stance. ?use learned Departmental Representative then emphasised that the plea of the company having gone in liquidation and that Mr. M. T. was appointed as its liquidator was not taken before the learned Commis sioner of Income‑tax anti hence it should not be allowed to be taken at this stage. The Authorised Representative of the appellant submitted, to reply, that the fact about the company having gone in liquidation is estab lished from several documents prevalent on department's record but the Appellate Assistant Commissioner failed to take note of them. He also produced for our perusal the Gazette of Punjab, dated the August, 1977 as its liquidator is published.
3. Having heard the arguments of the parties representatives and upon perusal of the departmental record we are convinced that the appellant ha A made out a case for our interference with the impugned order. From bare perusal of the order under appeal it is noted that the learned Commissioner of income‑tax has not doubted the fact of illness of Mr. M. T. H declined to accept the assessee's request for condonation of delay simply for the reason that the mere illness of the Managing Director of the company could not be said to be a sufficient ground for not filing the appeal within time. He unfortunately failed to look into the several documents prevalent on record from which it was evident that the company had gone under voluntary liquidation and that Mr. M. T. was appointed as liquidator. The affairs of the company after its liquidation were to be carried on by the liquidator and hence the decision for ass :fling the assessment made for the charge years in question or not was the sole concern of the liquidator. We are further convinced that the appeal was filed without any inordinate delay after the recovery of the liquidator from his illness as per medical certificate produced before the learned Commissioner of Income‑tax Appeals.
4. Under the aforesaid facts and circumstances of the case we would reverse the impugned order, condone the delay of five days occasioned to filing the appeal before the learned Commissioner of Income‑tae and remit the case to the Commissioner of Income‑tax (Appeals), Zone‑II, Rawalpindi with a direction to decide it on merits.
5. Now we take up the appeal for the charge year 1978‑79. The facts relevant so this appeal may be briefly stated as under. It was on 31st July, 1979 that the appellant‑Company at the meeting of its Board of Directors resolved to go in voluntary liquidation. A firm under the name and style of M/s. S. F. P., comprising of the same persons who were Directors in the above‑named private limited company which went in liquidation, was floated. The capital of the firm was contributed by the shareholders of the firm in the same proportion to which the shares were allotted to each of them in the com pany. It was decided by the company that the assets should be taken over by the firm. The transfer or the sale of assets of the company were taken aver by the firm with effect from 1st August, 1977, at their respective book values. Admittedly the book value of each asset transferred to the firm by the assessee‑Company was more than its written down value its on 31‑7‑1977. The Income tax Officer, therefore, in the assessment of the company worked out the profits under section 10 (2)(vii) of the repealed Income‑tax Act 1922 (hereafter referred to as the "Act"), at Rs. 86,101 as per working available in the assessment order. The assessee went in appeal before the Commissioner of Income‑tax (Appeals), Zone 11, Rawalpindi contending, inter alia, that section 10(2)(vii) was not applicable to facts of the instant case inasmuch as the transfer of assets from the assessee‑Company to the newly‑formed firm, namely, Messrs S. F. P., Factory Area, Sargodha was not a sale. No surplus bad thus accrued to the firm within the meaning of section 10(2)(vii) of the Act. The addition made on account of the alleged profits under sec tion 10(2)(vii) was thus assailed to be wrong. Before the learned Commis sioner it was also contended that in the assessment of the Registered Firm made subsequent to the assessment impugned bearing the depreciation was allowed by the Income‑tax Officer on the written deed value and not on the transfer value as shown in the books. The learned Commissioner of Income tax rejected the appeal on this ground with the following observation‑‑
"The contention is not acceptable, because the private limited company is a separate entity than the Registered Finn. The contention regard ing the adoption if the same written down value of the assets is also not relevant, because it is not the subject‑matter under appeal. As the profit under 10(2)(vii) is rightly computed by the Income‑tax officer in the hands of the company the contention of the appellant is rejected on this point and no interference is called for."
6. Mr. F. A. F. C. A., learned Authorised Representative of the Appellant reiterated the same contention before us which were made before the first appellate authority. He urged that the assessment of the partnership firm for charge year 1978‑79 was made on 25th June, 1979, and the purchase price of the assets in question was taken by the In come‑tax Officer at the written down value of each asset. The impunged assessment in the case of the assessee‑Company for the said year was made 00 16th May, 1981 and to this case the Income‑tax Officer worked out the profits under section 10(2)(vii), on the basis of their book value and the shown sale prix which admittedly more than written down value of these assets. In his submission, it is wrong on the part of the tax authorities to adopt the purchase price at one figure and the sale price at a different figure. The purchase price and sale price will, in his submission, remain the case in the case of both the purchaser as well as the seller. His main argument was that as a matter of fact the provisions of section 10(2)(vii) of the Act were not applicable inasmuch as there was no commercial sale of assets which could be said to have rise to taxable profits. He sought to support his contention by the following authorities :-
(1) (1963) 7 Taxation 57 (Trib.).
(2) (1966) 13 Taxation 185.
(3) (1969) 19 Taxation 209.
7. Mr. Y. S. learned Departmental Representative; inn the other hand, supported the impugned orders by contending that the sale of the assets in question had been effected because of the difference in status of the purchaser and the seller. In his submission, the purchaser was Registered‑firm whereas the seller was a private limited company and both of them were separate legal entities. The assessments according to him, are made in the hands of a peon, as defined in the Act and here too there were two different persons ft., a firm and a company. In his submission, therefore, the provisions of section l0(2)(vii) of the Act were rightly invoked and there is no real cause of grievance for the appellant. He maintained, without even making a reference to any of the cases cited by the learned counsel, for the appellant that the concept of transfer of assets by one to one‑self is wholly fallacious. He was unable to cite any authority in support of his contention.
8. We are not impressed by the arguments of the learned D. R. in the price of the authorities cited by the learned counsel for the appellant. It was further pointed out by the appellant's counsel, without being controverted by the D. R., that the depreciation 'had been allowed in the hands of firm on the written done value of the assets thereby affirming the principle enunciated in the above referred authorities that the transfer of assets from the company to the firm is not a sale so as to justify the allowance of depreciation on the book value of the assets. The department could not Justly adopt two different standards or basis for valuing the same assets in the hand of two different entities viz. the transfer and the transferee.
9. We may briefly refer to the facts of the above‑noted reported deci sions as the duct laid down therein are on all fours applicable to facts of the instant case and provide a complete answer to the contentions raised on behalf of the revenue before us. All these authorities manifestly lay down that the transfer of assets from the firm to the company upon the change of legal status from a partnership to a corporation is not a sale and, therefore, no surplus accrues to the appellant‑firm within the meaning of section 10(2)(vii) of the Act. The only difference, it may be noted, in the facts of the reported decisions and that of the case in hand is that in these cases the transfer of assets was made from the firm to the limited company whereas in the instant case the assets have been transferred by the limited company to the firm.
10. The facts of the case reported as (1963) 7 Tax. 57 (Trib.) were these, The partners of tile firm formed themselves into a private limited company. The shares allotted to each of the partners in the company were in the same proportion as the shares held by them in the firm. The assets of the firm having the written down value of Rs. 3,75,967 were transferred to the company at the original cost of Rs. 5,89,361. The Income‑tax Officer assess ed the difference between the original cost and the written, down value, namely, Rs. 2,13,349 under section 10(2)(vii) of the Act. On appeal, the Tribunal relying upon the cases, reported as (1955) 28 I T R 928 and (1958) 34 I T R 336, held that inclusion of the profit of Rs. 2,13,349 under sec tion 10(2)(vii) was not tenable. We may make a mention of the fact although it was not brought to our notice by the representatives of the parties that on a reference in that case, the Dacca High Court opinion that it was a transac tion of sale within the meaning of second proviso to section 10(2)(vii) of the Act and the resultant profit therefrom was liable to tax See (1966) 13 Tax. 271.
11. The facts of the case C. I. T. v. B. T. Ltd. ((1966) 13 Taxation 182), were that the firm comprising of six partners incorporated itself into a private limited com pany. The shareholders of the new company were the same as the former partners of the defunct firms and they were allotted a share of equal value as shareholders in the new company against their shares in the firm. The tenancy business was set up during "previous year" relevant to the assess ment year 1956‑57 and the firm. was allowed the benefit of additional depre ciation for the assessment year 1956‑57. After its incorporation, the company claimed additional depreciation for the years 1957‑58 and 1958‑59, also. The Income‑tax Officer allowed 10 % depreciation on machinery but declined to allow additional depreciation on the ground that the machinery was second‑hand and not installed by the assessee‑Company. The assessee's appeal to the Appellate Assistant Commissioner failed. On second appeal, the Appellate Tribunal held that there was no transfer or change in owner ship in the real sense inasmuch as the partners of the firm, who were carrying on their business had formed themselves into a private limited company. The Tribunal, therefore, allowed the additional depreciation for the years 1957‑58 and 1958‑59. The Lahore High Court affirming the view of the Tribunal, observed as follows :‑
"As already stated, the firm consisted of six partners and the persons who became shareholders of the company were not different. A fins and a company were not different legal entities but they are identical in this cm because the persons who are benefited by profits made by the firm and those made by the company are the same and these profits are shared by the same persons in identically the same propor tion and the mere fact that the firm has converted itself into a private limited company will not disentitle the assessee from claiming the additional depreciation, that has happened in this case is that the assets of the firm now belong to the company, no change has taken place in any respect, except in the legal status of the assessee from a partnership to a corporation.
In the case of a taxing statute the Court has to look to the real nature of the transaction and not to its form. In this case, we find that it is only a readjustment made by the partners of the firm to carry on their business as a limited company. The enterprise is the same, the persons are identical, the assets, machinery, building and plant have been absorbed in the share capital of the new company and in this way neither any change of ownership has taken place nor any re‑installation of machinery has been occasioned. In this view of the matter it cannot be said that the machinery is second‑hand and we are of the opinion that the depreciation claimed went with the assets and even if it can be said that the assets were owned by two different legal persons, the allowance has no reference to the persons who owned but is it attached to the machinery and plant itself."
12. The facts of the case C.I.T. T. v. P. I. ((1969) 19 Taxation 209), as appearing in the head notes were these :‑
A firm. consisting of five partners, was carrying on the business of manu facture and sale of condoned milk, ice‑crew, etc. It converted itself into a private limited company and transferred all the assets and liabi lities of the firm to the newly‑formed company at its book value. The fixed assets were transferred at their original cost of Rs. 4,20,801 while the written down value of the assets was estimated at Rs. 2,13,587. The difference between the original cost and the written down value i.e., a sum of Rs. 2,07,214 was treated by the income‑tax Officer as profits and tax was levied on this profit under the second proviso to sec tion 10(2)(vii) of the Income‑tax Act. Before the Appellate Tribunal the assessee contended that the transfer of the fixer assets was not within the mischief of section 10(20)(vii) of the Act as the shares allotted by the limited company to its shareholders were equivalent to the shares of the partners of the old firm. In these circumstances, it was argued, there was no sale which could result in any profits. The Appellate Tribunal accepting the assessee's contention held that the difference between the original cost and the written down value of the assets was net profits and, as such, it could not be assessed to tax by the Income‑tax Officer."
The Karachi Bench of the erstwhile High Court of West Pakistan answered the reference in affirmative. The conclusion arrived at by the learned Judges was that
'The majority view is that if the partners of s firm decide to float a company transferring their assets in the firm to the new company, such a transfer is not a sale. The contrary view would be a clog in chang ing the business of firm to corporate bodies, and they would be ham pered from converting themselves into limited companies and perhaps this may lead to some undesirable devices which the promoters of the new company may have to adopt for that purpose. We need riot repeat the well‑Known principle followed by the majority Courts that no person can himself be a buyer and seller and commercially it is not possible that such a sale, if at all, by any stretch of imagination, could be considered as one would result into any profit, and unless profit is made, such a transfer would not come within the mischief of section 10(2)(vii) of the Income‑tax Act. Legally no doubt, it is true that a company for separate entity from the subscribers of the company but logically and commercially it makes no sense at all that when partners in a firm decide to float a new company with almost the same shares in the new company to the extent of their shares in the firm they would be buyers and sellers of their own interest. The assets and liabilities of the firm are transferred to the company, but as share holders of the company their liabilities though limited but it is limited to the extent of their shares in the old firm. in view of the matter we fall to understand how this Act of persons who being transferor of their sharers in a firm to the new company which allots theca shares to the extent of their interest in the firm can be termed as a "sale", which can result in any profit."
[N.B.‑The contrary view expressed by the Dacca High Court in 13 Tax. 271 and to the Patna High Court in (1963) 48 I T R 483, was duly con sidered and dissented to].
13. From the facts mentioned above it is manifest that the view of the Tribunal has all along been that such transfers or change in ownership as is involved in the instant case, is not "sale" in the real sense and that the provisions of section 10(2)(vii) are not attracted to this type of transactions. This view has found favoured with the two High Courts in Pakistan as discussed above. There is thus no justification for us to depart from that view In passing, we may state that the Supreme Court of Pakistan in the case of E.V.Miller (PLD 1959 SC (Pak.) 219) has also held that in taxing statutes on should look at the real nature of the transaction instead of looking at its mere form.
14. For the reasons given hereinabove, we would hold that the provisions of section 10(2)(vii) of the Act were not applicable to the transaction in question and the impugned orders are, consequently reversed hereby.
15. In the result, both the appeals succeed and are allowed as indicated above.
M. z. M.
Appeal allowed