REGINA Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) The following question has been referred by the Appellate Tribunal, Cochin Bench, for the opinion of this Court:

(2.) The facts are these. The assessee was carrying on business at Trichur. The business consisted of oil mills, soap works and foundry. On 27-9-1954 a private limited company by name "I. I. Iyyappan Mills Ltd." was incorporated with a capital of Rs. 5 lakhs. The objects of the company were to acquire and take over the business which the assessee carried on as going concerns. The assessee was one of the promoters. On 1-12-1954 a deed of assignment was executed by the appellant in favour of the Managing Director of the company, Mr. Lonappan, transferring all his business with their assets and liabilities as going concerns for Rs. 5 lakhs. According to the deed, the consideration was paid by the allotment of 200 fully paid up shares of Rs. 2,500 each to the persons directed by the assessee. The assessee retained five shares of the value of Rs. 12,500/-. The other persons to whom the shares were allotted are his near relations. The Income Tax Officer held that the assessee sold away the assets which were previously used for his business in respect of which depreciation was allowed and in the transaction of sale to the company he realised a profit of Rs. 61,330/-. He therefore included this amount in the total income of the assessee for the previous year to the assessment year 56-57. On appeal by the assessee the Appellate Assistant Commissioner reached the same conclusion as that arrived at by the Income Tax Officer. It was found that a sale within the meaning of S.10(2)(vii) of the Income Tax Act, 1922 has been effected and the profit realised therefrom was correctly included in the total income for assessment. On second appeal before the Tribunal it was again contended that there was no sale by the assessee to the limited company and that there was no profit liable to tax under S.10(2)(vii) of the Act. According to the assessee, the transaction was a mere conversion of the proprietary concern into a limited company and was only a mere adjustment of rights. Alternatively, the transaction was a mere exchange and was not a sale and hence S.10(2)(vii) had no application. The Tribunal rejected these contentions and held that the transaction amounted to a sale. The second contention that the assessee did not derive any pecuniary gain in the transfer of assets to the limited company was also rejected. On these findings the Tribunal reached the conclusion that the second proviso to S.10(2)(vii) of the Act applies and sustained the assessment orders. On this a reference of the above question was asked for and allowed.

(3.) A reading of these provisions shows that all deprecations actually allowed to the assessee under the Act shall be deemed to be the profits of the previous year in which the sale took place if the sale amount exceeds the written down value.