ROGERS AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) MESSRS . Rogers and Co. carried on the busi***** of making aerated waters as a firm till the 6th of August 1949 and the partners of the firm were 11 in number. On the 6th of August 1949 this firm converted itself into a private limited company. The shareholders of this company were the same as the partners of the firm and the shares allotted to the shareholders were in the same proportion as the shares held by them in the partnership; the slight difference was due to the shares being rounded off to a specific number. The written -down value of the block assets of Messrs. Rogers and Co. in their books was Rs. 3,81,848/ -. These assets were transferred to the limited company at the original cost price of Rs. 4,85,354/ - and the Department contended that the limited company in the assessment year 1950 -51 was liable to pay tax on the difference between Rs. 4,85,354/ - and Rs. 3,81,848/ - by reason of the second proviso to Section 10(2)(vii) of the Income -tax Act.

(2.) TURNING to Section 10(2)(vii), it deals with depreciation and the second proviso is in the following terms : "Provided further that where the amount for which any such building, machinery or plant is sold, whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place." The only narrow question that we have to consider on this reference is whether on the facts and circumstances of this case it could be said that the building, machinery or plant was sold by the firm of Messrs. Rogers and Co. to the private limited company of Messrs. Rogers and Co. Ltd. If there was a sale, then the second proviso is attracted and the assessee company is liable to pay tax on the difference between the written down value and the cost price.

(3.) NOW it is elementary that a person cannot sell to himself for the purpose of income -tax, because a person cannot make profit out of himself. The basic idea underlying Section 10(2)(vii) is that the vendor has made profit by the transfer of his assets. Mr. Joshi is right that profit is notional, but still it is a profit; and in order that the profit should be made, there must be two parties to the transaction - the vendor and the vendee - and the vendor must make profit by transferring his asset to a third party. If he transfers it to himself, he cannot make profit either real or notional. These principles which we are enunciating were very clearly and emphatically enunciated in Commr. of Inc. -Tax, v. Sir Homi Mehta's Executors; 1955 -28 ITR 928 : (AIR 1956 Bombay 415). Mr. Joshi does not like those principles; but for good or for evil they are there till a higher Court tells us that they are not the correct principles which we laid down. Now that was a case where Sir Homi Mehta and his sons constituting a firm transferred certain shares to a private limited company. The shares were transferred of the value of Rs. 40 lakhs and the shares had originally cost Rs. 30 lakhs and the Department contended that the assessee must pay tax on the difference between Rs. 40 lakhs and Rs. 30 lakhs inasmuch as by transferring the shares to the company it had made a profit of the difference between Rs. 40 lakhs and Rs. 30 lakhs. We rejected this contention pointing out that though the assessee and his sons on the one hand and the private limited company formed by them on the other were distinct entities in law, the real result of the formation of the company and the transfer of the shares to the company was only that, instead of the shares being jointly held as individuals, they were held by these very persons as a limited company; that the so -called sale of the shares to the company was not a business activity entered into with the object of earning a profit and was not really a sale, but merely a procedure adopted for readjustment of their position as holders of the shares and the assessee did not make any profit or gain in a commercial sense by transferring the shares to the company. These observations apply wholly to the facts of the present case. Here the assets, instead of being jointly held by the eleven partners, are held by the limited company. This so -called sale of assets is not a business activity; they are not sold in the course of the business; they are not sold to make profits; they are merely transferred as a procedure adopted for readjustment of the partners as owners of these assets. Now, how is this decision sought to be distinguished ? The only distinction suggested is that this was a case where the assessee was selling his stock -in -trade and the question was whether in transferring his stock -in -trade he had made profit, but instead of this, now that we are dealing with depreciation under Section 10(2)(vii), the principle that may apply to the sale of the stock -in -trade would not apply to the case of depreciation. Now, the importance of this decision - if it has any - is that we considered whether a particular transaction constituted a sale for the purpose of taxing law and we drew a distinction between sale in a technical, legalistic sense and sale from a commercial point of view as representing a real transaction. If that principle was correctly enunciated then we see no reason why it does not apply to the case of a sale under Section 10(2)(vii). It must apply to all cases of sale dealt with under the Indian Income -tax Act, unless there is something in the section itself which makes it clear that the sale contemplated by the Legislature is not only a sale where according to the real transaction, from the commercial point of view, it is a, sale, but even where it is a sale from a legal and technical point of view. Why are we to construe the expression "sale" in the second proviso in the wide manner suggested by Mr. Joshi ? Why are we to say that the assessees have made notional profits out of a transaction when in reality that transaction is nothing more than a readjustment of the position of the assessees quae their business ? There is no indication given by the Legislature that the expression "sale" in this second proviso should be construed, not from the point of view of the ordinary canon of construction laid down with regard to taxing laws, but according to some special canon of construction. In our opinion, if Sir Homi Mehta's case (AIR 1956 Bombay 415) correctly laid down the law, then we must come to the conclusion that the transaction effected between the firm of Rogers and Co. and the private limited company was not a sale and if it was not a sale, the provisions of the second proviso are not attracted.