KASTURI Vs. COMMISSIONER OF INCOME TAX MADRAS

JUDGEMENT

(1.) THE assessee was previously a registered firm of two partners being the proprietors, publishers and printers of the newspaper "The Hindu". This business had been assessed under the 1918 Income -tax Act. In 1940, the partnership firm was dissolved and a limited company took its place. The partnership purported to sell to the limited company the entire business as a going concern. The interest in the partnership had been owned in moieties by two brothers, K. Srinivasan and K. Gopalan, who were the kartas of their respective Hindu undivided families. The capital of the limited company of Rs. 9 lakhs was divided into 900 shares of Rs. 1, 000 each, and each branch was allotted half the number of shares. In the books of the company, the assets and liabilities were valued at particular figures. One of the items so transferred was the stock of newsprint, the cost price of which was Rs. 73, 693. But the valuation adopted at the time of the transfer of the business to the limited company was Rs. 1, 74, 363. For the assessment year 1940 -41, the assessee claimed the benefit of the succession relief and asked that the profit of a period of 20 months, that is, the period between the end of the previous year and the date of the succession, should not be taxed. This contention was rejected in conformity with the decision of the Supreme Court, and an assessment for the year in question was made. Subsequently, when an appeal against the assessment was pending, the Income -tax Officer purported to hold, on an examination of the accounts of the successor company, that a profit had been realised by the sale of the stock of the newsprint, represented by the difference between the valuation on the transfer to the limited company and the cost price set down in the books of the partnership. He, accordingly, issued a notice under section 34, and revised the assessment, enhancing the taxable income by the profit of Rs. 1 lakh and odd referred to.On an appeal to the Appellate Assistant Commissioner, the view of the Income -tax Officer was, in so far as this quantum of profit was concerned, upheld. But the Appellate Assistant Commissioner set aside the assessment and directed the Income -tax Officer to determine the profits for the two periods of 12 months and 8 months on the basis of the accounts and not on the time basis. A further appeal to the Tribunal however failed as the Tribunal held that since the assessment had been set aside, the appeal to it was premature.

(2.) THEREAFTER , the assessee applied to the Tribunal for the statement of a case to the High Court on certain questions of law which were claimed to arise from the order of the Tribunal. Four questions stand referred to us. One of these is :

(3.) THE short question thus is whether, on the transfer of a business as a going concern, the valuation of the stock of newsprint for the purpose of the transfer would, if it should happen to exceed the cost price of the newsprint in the books of the firm, result in taxable profits to the transferor. Mr. S. Padmanabhan, learned counsel for the assessee, argues that this question has been decided in favour of the assessee in a decision of the Supreme Court in Commissioner of Income -tax v. West Coast Chemicals and Industries Ltd. Before we refer to the facts of this decision, we may point out that it is agreed that the assessee was not a dealer in newsprint and that the assessee held stocks of newsprint only for the purpose of its business of the publication of the newspaper. It was raw material of the business. In the case cited, the assessee -company entered into an agreement for the sale of the land, building, plant and machinery of a match factory with a view to close down the business. There was a default in the payment by the purchaser and a fresh agreement was entered into. In this latter agreement was included the sale of chemicals and paper used for manufacture. This had not been included in the earlier agreement. Among the terms of the agreement, there was the stipulation that the assessee -company should carry on the manufacture on behalf of the purchaser. On the terms of this second agreement, the department purported to bring to tax the "profit" derived from the sale of chemicals and paper as profits of the business. The assessee objected contending that it was a realisation sale and that the amount would not be liable to tax. It also appears that the memorandum of association of the assessee -company permitted the company to manufacture and sell chemicals so that the sale of chemicals could in proper circumstances form a part of its business. It was found as a fact that that power had been rarely exercised and was therefore not of much significance. Their Lordships held that the transaction inclusive of the sale of chemicals and other material was only part of a winding -up sale in order to close down the business and to realise all the assets. Whether or not a sale is a realisation sale or one in the course of a business would depend upon the peculiar facts of each case and there can be no set rule for the decision of that point. Their Lordships refer to the dividing line between the two classes of cases, one where the sale forms part of trading activities and the other where the realisation was not an act of trading, typified by the well -known cases of Californian Copper Syndicate v. Harris, on the one hand, and Tebrau (Johore) Rubber Syndicate Limited v. Farmer, on the other. They then proceeded to refer to Doughty v. Commissioner of Taxes. In that case, two partners carrying on business as general merchants sold the partnership to a limited company. The sale was of the entire assets including the goodwill. At the time of the sale, a new balance -sheet was prepared in which a value was placed on the stock -in -trade larger than that shown in the last balance -sheet. This difference was sought to be brought to tax as profit. The Privy Council held this to be wrong, pointing out that in order that a taxable profit may arise, there should be a trading, and that the mere alteration of entries in the books of account would not lead to such a profit.Another decision, J. and R. O'Kane and Co. v. Commissioners of Inland Revenue was also referred to by their Lordships. In that case, the assessees, who carried on a business as wine and spirit merchants, decided to retire from business, and issued a circular letter to their customers proposing to sell their whole stock to the customers. The question was whether such sales could be regarded as sales made in the ordinary course of trade. While the King's Bench Division held the sales were not in the ordinary course of trade but were part of the realisation of the trading stock and the winding up of the business, the Court of Appeal took the opposite view. It was pointed by the Court of Appeal that, though the assesses wished to retire from business and were not investing in the purchase of mere stock, they were still carrying on business of trading till the existing stocks were exhausted. That view was upheld by the House of Lords. Finally, their Lordships observed thus :