LAWS(GJH)-1980-8-22

ARTEX MFG COMPANY Vs. COMMISSIONER OF INCOME TAX

Decided On August 28, 1980
Artex Mfg Company Appellant
V/S
COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

(1.) IN this case, at the instance of the assessee, the following six question have been referred by the Tribunal to us for our opinion :

(2.) WE are concerned in this case with the assessment year 1967 -68, the previous year being financial year ending on March 31, 1967. The assessee is a partnership firm. A private limited company by the name of Artex Mfg. Co. P. Ltd. was formed with a view to take over the business of the assessee as a running concern, and the assessee is M/s. Artex Manufacturing Co. An agreement was made between the partnership firm and the limited company on March 31, 1966. In accordance with this agreement, the business carried on till that date by the assessee -firm was sold to the company as a going concern and the partners of the erstwhile firm became shareholders of the company. The partners were given shares in the same proportion in which the partners shared the profits or losses of the firm. The net purchase consideration was fixed at Rs. 11,50,400 and this amount was paid in the shape of 11,504 fully paid equity shares of Rs. 100 each and the shares were allotted in accordance with the shares of the partners in the assessee -firm. The assessee -firm filed its return showing 'nil' income and stated that the partnership firm had been converted into a private limited company with effect from April 1, 1966, and the firm had no income during the previous year ended March 31, 1967. Again, on January 9, 1970, a revised return was filed showing 'nil' income with a note that inasmuch as the firm was converted into a private limited company as a going concern, there was no income chargeable to tax either under s. 41(2) or under s. 45 of the I.T. Act, 1961. It was contended before the ITO that the conditions for invoking s. 41(2) did not apply inasmuch as business was not carried on by the firm during the previous year and the assets were not used during the year for the purpose of the business and hence the balancing charge under s. 41(2) could not be brought to tax. Purporting to rely on the Supreme Court's decision in CIT v. B. M. Kharwar : [1969]72ITR603(SC) , the ITO rejected this contention of the assessee and held that the surplus in respect of certain items was chargeable to tax under s. 41(2) of the Act. On appeal before the AAC the assessee succeeded and it was held by the ACC that the surplus was assessable under the head 'Capital gains' and not under the head 'Business' and as regards the status of the assessee, the ACC held that the assessee must be taxed in the status of an 'association of persons'.

(3.) BEFORE we got to the legal position applicable to the facts of the case, it will be necessary for us to refer briefly to the agreement dated March 31, 1966, between the assessee -firm and the private limited company. The agreement was between five partners of the firm of Artex . and in the agreement the private limited company is referred to as the 'company'. The recitals in the agreement mention, inter alia, that the vendors had for some time past been carrying on the business of manufacturing art silk cloth at New Cotton Mill, No. 1 Compound, outside Rajpur Gate, Kankaria Road, Ahmedabad, under the firm name and style of Artex . and it was agreed between the parties that the vendors should sell and the company should purchase all the rented premises taken on monthly rent from the Ahmedabad New Cotton Mills Co. Ltd., situated outside Raipur Gate, Kankaria licences, quota rights, motor cars and other vehicles, stock -in -trade, implements, electric power, telephones, and equipments with which the vendors were connected in connection with the said business. Thirdly, all the book debts and other debts due to the vendors in connection with the said business and the full benefit of all securities for such debts were to be transferred to the company. Full benefits of the pending contracts, engagements and orders in connection with the said business and all cash in hand or in bank and bills and notes in connection with the said business were also to be transferred to the company. Under clause (2) of the agreement it has been recited :