K M S REDDY COMMISSIONER OF INCOME TAX KERALA COIMBATORE ERNAKULAM Vs. WEST COST CHEMICALS AND INDUSTRIES LTD

JUDGEMENT

(1.) In this appeal by the commissioner of income-tax, Kerala, filed with certificate of the High Court of Kerala, an important question of law was raised before the High court, which was answered against the Department. It arose in the following circumstances. The respondent, the West Coast Chemicals and Industries, ltd. (referred to as the assessee Company) was incorporated in 1937 primarily with the object of acquiring and working the rights, title and interest in a match factory belonging to one A. V. Thomas at Medical. The Memorandum of Association of the assessee Company, however, empowered the company to manufacture and deal in acids, alkalis and other chemicals. The assessee Company carried on its business of manufacturing matches till the account year ending on April 30, 1941. Thereafter, the profits from the business became less and less due to War conditions, and the assessee Company began to manufacture plywood chests for tea, paints and lemongrass oil. These were contemplated by cl. (3) of the Memorandum of association.

(2.) On May, 9, 1943, the assessee Company entered into an agreement with one Rao Sahib natesa Iyer for the sale of the lands, buildings, plant and machinery of its match factory for rs. 5, 75,000. It was agreed that the price would not include manufactured goods, chemicals and other raw materials or any other asset not shown in the agreement of sale. The purchaser was allowed sixty days for the payment of the balance of the price, Rs. 57,500 having been already paid at the time the agreement was entered into. The purchaser made a default in payment, and on august 9, 1943, a fresh agreement was entered into by the parties, this time for a consideration of Rs. 7,35,000, and the sale included chemicals and paper for manufacture which had not been sold in the first instance. In a confidential report made on August 1, 19,44, to the shareholders, the directors stated that the price obtained had shown a capital appreciation of about six times the cost price, and the sale of chemicals had also resulted in a substantial profit.

(3.) Meanwhile, the assessment of the Company for the account year ending April 30, 1944, had been completed by the Deputy Commissioner of income-tax, and the assessee Company had been assessed on an income of Rs. 36,498-6 4. The deputy Commissioner of Income-tax then issued a notice under s. 25 of the Travancore Income-tax act to the Company's Liquidator on the ground that the profits from the sale of the chemicals and paper for manufacture had escaped assessment. The Official Liquidator took up the position that the match manufacturing had been stopped, and that business had been wound up, and there was thus only an appreciation of the capital assets and not a business profit, which was liable to assessment. The Deputy Commissioner, however, relying upon the Memorandum of Association, which allowed the assessee Company to manufacture and sell chemicals, and on the Directors' report, held that the assessee Company was liable to income- tax on a profit of Rs. 2 lakhs arising from this sale. The Commissioner of Income-tax on appeal, however, reduced the assessable profits to Rs. 1,15,259. Before the Commissioner, the Liquidator admitted that the profit from the sale of the chemicals was rs. 1,15,259.