COMMISSIONER OF INCOME TAX Vs. HIND CONSTRUCTION LTD

JUDGEMENT

(1.) The point to be decided in this reference, under Section 66(2) of the Indian Income-tax Act, 1922, is whether a sum of Rs. 4,00,000 should be included in the total income of the assessee. The Income-tax Officer included the said sum, but the Appellate Assistant Commissioner and the Appellate Tribunal excluded the said amount and decided against the revenue. The facts may be briefly stated as follows : There was a joint venture run by Messrs. Bhagwanraj Patel & Co. and Messrs. Premier Suppliers Co. Ltd. for purchase and sale of machinery from the disposal department of Assam and each one of them was to receive half share in the joint venture. On the 22nd October, 1949, Messrs. Premier Suppliers Co. Ltd. sold their interest in the venture to the assessee-company and Messrs. Bhagwanraj Patel & Co. sold their interest to Patel Engineering Co., as a result whereof the assessee-company and Messrs. Patel Engineering Co. became interested in the said venture. The stock of the machinery, remaining unsold, was thereafter divided between the assessee-company and Patel Engineering Co. The assessee-company received machinery valued at Rs. 2,06,372 in its share. In the assessee-company's account books for 1949-50, the value of the machinery was written up by Rs. 4,00,000 an equivalent sum having been credited to a reserve capital account. During this accounting period, the assessee and Patel Engineering Co. formed a partnership firm known as "Hind Patel Co." in which each had an 8 annas share and the assessee transferred this stock of machinery, at the book value of Rs. 6,06,372, to the new firm. Similarly, Messrs. Patel Engineering Co. also trensferred their share of machinery, which they had received on the dissolution of joint venture, to the new firm, after similarly appreciating the value of the machinery. The machinery thus valued at Rs. 6,06,372 by each of the partners remained the investmet of each pne of them in their partnership firm, Messrs. Hind Patel Co. On 1st April, 1950, counter-debit and credit entries were made in the assessee's and the firm's books, respectively. The firm credited the capital account of the assessee with Rs. 6,06,372 and debited the machinery account with an equal amount. The. entries in respect of Messrs. Patel Engineering Co. were also similarly made.

(2.) The assessment year, in the present reference, is 1951-52, for which the relevant accounting year, is the financial year 1905-51. No depreciation was allowed either on the original cost or on the appreciated value of such machinery in the assessment year 1950-51 or in 1951-52. The Income-tax Officer held the transaction as a sale of machinery originally valued at Rs. 2,06,372 for a sum of Rs. 6,06,372, and, accordingly, decided that the amount of Rs. 400,000 was profit of the assessee from the business on the sale of machinery in the year under consideration. The assessee appealed against the said order of the Income-tax. Officer to the Appellate Assistant Commissioner, who held that there was no sale of machinery by the assessee, nor was there any profit and allowed the appeal in favour of the assessee on the ground that the transaction did not yield any profit. The revenue preferred an appeal to the Tribunal but the said appeal was dismissed, Thereafter, under the directions of this court, a statement of the case was called for and the following question is required to be answered by us :

(3.) Mr. Balai Pal, learned counsel for the revenue, has contended before us that the Tribunal has erroneously deleted the said sum of Rs. 4,00,000 from the total income of the assessee for the reasons mentioned as follows. (a) Whatever may be the form and the manner in which the transaction was entered into the taxability of the income or profit arising out of such transaction would depend upon the substantial character of the transaction. In the instant case, the transaction was really in the nature of a sale of machinery, inasmuch as the assessee-company although happens to be a partner in Hind Patel & Co. is virtually selling his interest in the machinery to the firm at a profit of Rs. 4,00,000 and, as such, the said amount of Rs. 4,00,000 should be included in the total income of the assessee as his profit. The purchaser and the seller are different persons, the purchaser being the firm and one of the sellers being the assessee-company. (b) The transaction should be looked at from a commercial point of view. The assessee had to show in his books of account that the value of the machinery was originally Rs. 2,06,745 and the value of the same machinery was put in the firm's account at an appreciated value of Rs. 6,06,373. Thus, there is a clear transfer of the partner's asset to the firm for a higher value of Rs. 6,06,373. The machinery was assessed at a higher value because the assessee-company was convinced that that value was the correct value of the machinery in the market. (c) The transfer or sale of the machinery at a higher value or price took place between two distinct personolities, namely, the assessee-company and the partnership firm, and, as such, the Tribunal wrongly held that no element of transfer of sale could be involved in the transactions between the same parties.