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Petitioner: M/S. Crescent Pak. Soap & Oil Mills Ltd. VS Respondent: Commissioner Of Income Tax
Court Name: Sindh High Court Judge(s): Naimuddin Ahmed, k.A Ghani, Fakhruddin H. Shaikh Title:M/S. Crescent Pak. Soap & Oil Mills Ltd. vs Commissioner Of Income Tax
JUDGMENT
Reported As: PTCL 1985 (CL) 73 Result:RESULT: The question"Whether; on the facts and in the circumstances of the case the Tribunal was jus Judgment JUDGMENT: NAIMUDDIN, J.--1. By this Income-tax Reference under section 66(1) of the Income-tax Act, 1922 (hereinafter referred to as the Act), the Income-tax Appellate Tribunal, Karachi Bench, Karachi by the order dated 19-12-1969, has referred the following question arising' out of its order dated 18-4- 1968 passed in Income-tax appeal No. 655 of 1966-67. "Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the transaction of transfer of fixed assets was not a sale so as to attract the provisions of section 10 (2)(vii) of the Income-tax Act." 2. The facts of the case giving rise to the above question are that a firm known as "Crescent Pak. Oil Mills, Karachi Manghopir Road, Site, Karachi, was carrying on business of manufacturing soap during the assessm ent year 1961-62. The firm was converted into a private limited liability company, the original partners of firm became the shareholders of the company by the same name by a vendors agreement dated 31-1-1961. The firm's running business as on 31-1-1961 was taken over by the company. According to the agreement goodwill, plants, machinery, motorcars, vehicles, furnitures, fixtures, other movable and immovable properties, assets, stocks in trade, books and other debts with benefits of all leases, securities, pending contracts, orders,
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engagements, services, all cash in hand or in banks, all bills and all rights, and properties belonging to the Vendors or to which the Vendors were entitled in connection with the management of the business of the firm, details and valuation whereof are listed in the Schedule annexed to the agreement, were taken over by the company. 3. The sale consideration of Rs. 48,00,900 was agreed to be paid as follows: "(i) Rs. 4,80,000 (Rupees Four Lacs Eighty Thousand) by the allotment amongst the Vendors proportionate to their shares in the partnership fully paid up shares of the Company initially from the capital outlay of Rs. 5 Lacs and thereafter immediately upon the sanction of the Government Authorities concerned to the requisite capital structure of the Company in the same proportion as their respective shares in the partnership and to the extent of their shares remaining from the initial allotment of shares from the commencing capital." "As residue of the consideration for the said sale the Company shall undertake to pay and discharge all the debts and liabilities and contracts incurred or made by the Vendors in the running of the said business as listed in the Schedule annexed hereto and marked 'B' and shall indemnify the Vendors against all claims in respect thereof". 4. The firm filed Return of Income for the assessment year 1961-62 showing the actual business upto 31-1-1961. 5. The Income-tax Officer by the assessment order, dated 18-4-1968 found that the price for which the aforesaid assets were sold amounted to Rs. 1,39,37,282. After making certain adjustments he worked out a surplus of Rs. 22,48,758 which in his opinion was the profit taxable under section 10 (2) (vii) of the Act being the difference between the sale price over the written down value of the assets taken over by the company. 6. The firm preferred direct appeal with the Tribunal wherein the taxability of the surplus amongst other items was questioned on the ground that in the circumstances of the case there was no sale as the entire business, as a going concern was transferred to the company, having the same Share-holders as the succeeded firm had the partners. 7. Before the Tribunal reliance was placed on its earlier decision in I.T.A. No. 831 of 1962-63, dated 13- 11-1963 which was ultimately confirmed by the High Court of West Pakistan, Karachi Bench, Karachi in income-tax Reference No. 184 of 1964 PLD 1969 Kar. 606 and also on the decision of Supreme Court of India in case of Commissioner of income-tax (Central) Calcutta v. Mugneeram Bangur and Company (Land Department) (1965) 57 I T R 299: A 1 R 1966 SC 50 holding that in a real sense there was no sale and consequently no profits. The finding of the Tribunal in case under consideration before us in this regard was as follows: "The last objection too must be answered in favour of the appellant as we find that in view of our own decision and the other judicial pronouncements referred to above, sale of the firm's assets as a going concern to a limited company comprising of the same Share-holders as these were partners in the firm, does not amount to a sale within the meaning of section 10 (2)(vii) so as to attract chargeability in respect of the surplus arrived at by this artificial arrangement of transfer of assets. In this view of the matter we need not dwell at this stage on the appellant's claim regarding the correct sale price of the depreciable assets and the actual profit determined under section 10
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(2)(vii) by the Income-tax Officer." 8. This decision, therefore, led the applicant to make an application under section 66 of the Act before the Tribunal and accordingly, the Tribunal has referred the question to this Court which first came up before a Division Bench which finding difference of opinion expressed by this Court in an earlier case on a similar question referred to this Court in Commissioner of Income-tax v. Publix Industries PLD 1969 Kar. 606: (1969) 19 Taxation 209, on the one hand and the opinion expressed by Dacca High Court in Commissioner of Income-tax, East Pakistan, Dacca v. A.K. Khan Plywood Co., Chittagong (1966) 13 Taxation 271 and Lahore High Court in the Commissioner of Income-tax, North Zone, Lahore v. Haji Abdul Majid Khan Zaman & Co., Burewala PLD 1973 Lah. 843: 1973 PTD 459: (1973) 28 Taxation 78, recommended the constitution of a larger Bench to hear this case. Accordingly, a Full Bench was constituted and ultimately it has come up before us. 9. We have heard Mr. Shaikh Haider learned counsel for the petitioner and Mr. Ali Athar learned counsel for the respondent. 10. It is contended by Mr. Shaikh Haider that the transaction in question was a sale as clearly expressed by the Vendor's Agreement dated 31-1-1961, by the firm to a limited liability company which is a separate legal entity from the firm and accordingly he submitted that the transaction was a sale within the meaning of section 10 (2)(vii) of the Income-tax Act, 1922. He further contended that the transaction in question was not a slump transaction. In support of his first contention he relied on Commissioner of Income-tax, East Pakistan, Dacca ' v. A.K. Khan Plywood Co., Chittagong (1966) 13 Taxation 271, PLD 1966 Dacca ( ), Commissioner of Income-tax North Zone, Lahore v. Haji Abdul Majid Khan Zaman & Co., Burewala 1973 PTD 459, PLD 1973 Lah. 843: 28 Taxation 78 and Commissioner of Income-tax v. Karimi Industries Peshawar 1983 PTD I0O. He has also relied on three decisions from Indian Jurisdiction in Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income-tax, Bihar and Orissa (1963) 48 I T R 483- and A r t e x Manufacturing Co. v. Commissioner of Income-tax Gujrat-II (1981) 131 I T R 559 and Pandit Lakshmikanta Jha v. Commissioner of Income-tax Bihar and Orissa (1970) 75 I T R 790. 11. On the other hand, Mr. Ali Athar contended that the transfer of the assets by the firm to the limited liability company was readjustment of business and not in reality or actuality a sale or transfer. In support of his contention the learned counsel relied on William Richard Dought v. Commissioner of Taxes AIR 1927 P C 76, Commissioner of Income-tax v. Messrs Bufco Tanneries Ltd. PLD 1966 (W.P.) Lah. 244: (1966) 13 Taxation 185, Commissioner of Income-tax, Karachi East, Karachi v. Messrs Amsons Dairies Ltd., Karachi 1971 SCMR 589, Commissioner of Income-tax v. Gammon Pak Limited, Karachi (1966) 14 Taxation 304. 12. He further contended that the transaction of sale in question as a going concern was a slump transaction as the amount of consideration in addition to the payment of liability was for the goodwill, plants, machineries, furnitures, fixtures and other movable properties, assets, stock in trade, book and other debts with the benefit of all leases, rights, securities, pending contracts, orders, engagements services, all cash in hand or in Banks, all bills and all other rights and properties belonging to the Vendors or to which the Vendors were entitled in connection with the management of the said business. In support of this contention the learned counsel relied on Commissioner of Income-tax (Central) Calcutta v. Messrs Mugneeram Bangur & Co. (Land Department) AIR 1966 SC 50: (1965) 57 I T R 299, Sarabhai M. Chemicals Private Ltd. v. P.N. Mittal, Competent Authority, Inspecting Assistant Commissioner of Income- tax, Acquisition Range-11,
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Ahmadabad and another (1980) 126 1 T R 1). 13. He further contended that in any case, the Courts are entitled to lift the veil of incorporation to see at the real nature of the transaction. He supported the contention by citing the President v. Mr. Justice Shoukat Ali PLD 1971 SC 585, West Pakistan Road Transport Board, Lahore v. Commissioner of Income-tax, Lahore (1974) 29 Taxation 53, Sind Industrial Trading Estate Ltd. v. Central Board of Revenue and 3 other PLD 1975 Kar. 128, and Commissioner of Income-tax, Punjab & N.W.F.P, and Bahawalpur v. Mrs. E.V. Miller PLD 1959 SC (Pak.)219. 14. Taking up the question, it may at the very outset be stated that in the order of the Tribunal out of which the present reference has arisen, it was found that the sale of the firm's assets as a going concern to a limited company comprising of the same shareholders as were partners in the firm, does not amount to a sale within the meaning of section 10 (2)(vii) of the Act so as to attract chargeability in respect of surplus by artificial arrangement of transfer of assets. We may here first reproduce the finding of the Tribunal which is as follows: "The last objection too must be answered in favour of the appellant as we find that in view of our own decision and the other judicial pronouncements referred to above, sale of the firm's assets as a going concern to a limited company comprising of the same Share-holders as these were partners in the firm, does not amount to sale within the meaning of section 10(2)(vii) so as to attract chargeability in respect of the surplus arrived at by this artificial arrangement of transfer of assets, In this view of the matter we need not dwell at this stage on the appellant's claim regarding the. Correct sale price of depreciable assets and the actual profit determined under section 10(2) (vii) by the Income-tax Officer." 15. Now, admittedly, all the assets and liabilities of the firm together with goodwill, benefits of all leases, pending contracts, orders, engagements services by the agreement dated 31-1-1961, were transferred for a consideration of Rs. 48,00,000. From the schedules to the agreement of the assets and liabilities (Schedules "A" and "B"), it is clear that the assets and liabilities were shown in accordance with their book values as on 31-1-1961. It may be of advantage, if we reproduce hereinbelow both the schedules. SCHEDULE "A" (i) FIXED ASSETS: Land & Building Plant & Machinery Motor Cars & Vehicles (ii) STOCK IN HAND: Goods on Process, Raw Materials Soaps, Oils, and Building Materials (i.e) BOOK DEBITS......................... (iv) ADVANCES & DEPOSITS................... (v) CASH & BANK BALANCES: Cash in Hand 39,539.54 In current Accounts with Bankers............. 32,875.37 TOTAL................. ....................................... SCHEDULE "B" LIST OF LIABILITIES ON 31ST JANUARY, 1961. The amount of 48,00,000 paid as consideration was therefore, an amount which was in excess of the value of assets after deducting the liabilities. The liabilities shown in the book included amount of Rs.11,44,379.40 shown in the schedule of liabilities under the head "DEPRECIATION RESERVE". Thus it cannot be said that how much amount out of Rs. 48 lakhs was paid by the company to the firm for goodwill, leasehold rights and other benefits. Again no particular amount or amounts out of the
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excess amount Rs. 48 Lakhs could be pitched against book values of assets as obtaining on 31-1- 1961, in the books of account. 16. In the instant case, it was sale of the assets on which depreciation was claimed which is relevant, lt will, therefore, be convenient, if we reproduce the relevant provisions which read as follows: "1 (vii) In respect of any such building, machinery or plant which has been sold, transferred by way of exchange, or is compulsorily acquired by a competent authority under any law for the time being in force', or discarded or demolished or destroyed in the previous year, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant is actually sold, transferred or compulsorily acquired, as the case may be, or its scrap value: PROVIDED that such amount is actually written of in the books of the assessee: PROVIDED further that where the amount for which such building, machinery or plant is sold, transferred or compulsorily acquired, 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 profit of the previous year in which the sale, transfer or compulsory acquisition, as the case may be, took place and the business, profession or vocation in which such building, machinery, or plant has been used, shall, for the purposes of subsection (1), be deemed to be carried on by the assessee in the year in which the sale, exchange or acquisition, as the case may be took place: PROVIDED further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant which has been discarded or demolished or destroyed, and the amount of such moneys does not exceed the written down value, the amount allowable under this clause shall be the amount if any, by which the difference between the written down value and the scrap value exceeds the amount of such moneys: PROVIDED further that where any insurance, salvage or compensation moneys are received in respect of any such building, machinery or plant as aforesaid, and the amount of such moneys exceeds the difference between the written down value and the scrap value no amount shall be allowable under this clause and so much of the excess as does not exceed the difference between the original cost and the written down value less the scrap value shall be deemed to be profits of the previous year in which such moneys were received: PROVIDED further that for the purpose of this clause, the original cost of a building, the written down value of which is determined in accordance with the first provision to sub-section(5), shall be deemed to be the written down value so determined as at the date of its being brought into use of the purpose of the business, profession or vocation." Now, unless the price of the buildings, plant and machinery, which was sold, was shown itemwise or as a whole, it was not possible out of the total consideration settled for transfer, to assign any particular amount or amounts to building, plant and machinery sold. It appears from the schedule that on assets side, the cost value of the said properties shown was without deduction of depreciation therefrom and therefore, on the liabilities side, the amount of depreciation reserve was shown separately. Thus if, the amount of depreciation was not shown separately, naturally the
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net value of the said properties after deduction of the amount of depreciation would have been shown. Further since the sale consideration paid was for the entire going concern, therefore, it is not possible to say that any particular amount or amounts out of Rs. 48 lacs were pitched against buildings, plant and machinery. It is, therefore, clear that it was a slump transaction. Therefore, it cannot be said that proviso to the clause (vii) of sub-section (2) of section 10 of the Act would or could be attracted. 17. A similar question came up for consideration before the Judicial Committee of the Privy Council in William Richard Doughty v. Commissioner of Taxes AIR 1927 P C 76. This was an appeal from the judgment of the Court of Appeal of NewZealand reversing the decision of Stout, C.J., on an application by the Commissioner of Taxes seeking to assess the appellant to income-tax in the sum of 6,010 in respect of income for the year ending on March 31, 1921. On the proceedings taken in respect of this assessment a case was stated by the Commissioner which, according to the practice in New Zealand, was traversable and was accordingly traversed by the appellant in his answer, and the matter came in the first instance before a Magistrate and was decided in favour of the Commissioner. His decision was, however, appealable both on grounds of fact and law to a Judge of the High Court, in this case the decision of Stout C.J., was final on fact, but not on a matter of law. The circumstances of the case before their Lordships, as stated in the judgment, were: The appellant and one Arthur John George carried on business, at Wellington as wholesale soft goods merchants and drapers in partnership. On the 25th June, 1920, they converted their partnership into a private limited company of which they were the only two shareholders. The company had a nominal capital of 175,000 in 1 shares of which 100,000 were ordinary 25,000 were A preference shares and 50,0 were B preference shares. The arrangement, which was embodied in an agreement dated 25th June, 1920, was that the partners as vendors should sell to the company and the company should purchase as from 20th January then past, the goodwill of the business, the leaseholds, plant, machinery, book debts, the benefit of pending contracts, all cash bills and notes, and generally all property to which the vendors were entitled in connection with the business. Part of the consideration for the sale was the. Allotment to the vendors of 76,000 paid-up shares, 30,000 ordinary shares to George and .50,000 to the appellant, and 16,000 B preference shares to George. The residue of the consideration was the undertaking by the company to satisfy all the liabilities and engagements of the firm. The vendors contracted not to carry on the business of a draper of independently of the company, and they stated that they had in certain proportions subscribed the Memokrandunm of Association for all the 175,0 shares in the company, each thus according to his proportion rendering himself liable to that extent for the debts of the company. The last balance sheet of the old partnership stood as follows: ASSETS s d Furniture and fittings 513 18 4 Cash at Bank 106 11 3 Cash on hand and customs 432 7 11 Sundry debtors 45,15 1 17 0 Bills receivable current 5,896 3 3 War loans 1,974 12 6 Stock in hand 43,357 18 10 97 433 9 1
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The same was corrected in one respect as 7,800 was due for unpaid income tax, thereby reducing the capital account from 48,774 12s Od. To 40,974 12s. Od. The partners having fixed the price at which they sold, if it could be called a sale, their business to the company, it remained to adjust the figures on the last balance sheet in accordance with this arrangement, 76,000 being evidently more than the sum standing to the credit of the capital account; and, in order to effect this, the item on the asset side "stock in hand 43,357 18s. 10d." was replaced by an item "stock and goodwill 78,383 6s 10d." Their Lordships dealt with some of cases cited before them particularly J &. M Craig Kilmarnock Ltd. v. Inland Revenue (1914) SC 338 wherein they observed at page 80 of the report as follows: "Their Lordships would repeat that if a business be one of purely buying and selling, like the present, a profit made by the sale of the whole of the stock, if it stood by itself, might well be assessable to income-tax; but their view of the facts (if it be open to them to consider the facts) is the same as that of Stout, C.J. That is, that this was a slump transaction." Accordingly, their Lordships allowed the appeal and restored the judgment of Stout, C.J. This case, therefore, fully supports the view taken by the Income- tax Tribunal. 18. This case was followed by the Supreme Court of India in Commissioner of Income-tax (Central) Calcutta v. M/s. Mugneeram Bangur &. Co. (Land Department) A 1 R 1966 SC 5O. The facts of this case were that M/s. Mugneeram Bangur and .Co. (Land Department) Calcutta were a firm and carrying on the business of land development in Calcutta. By an agreement dated July 7, 1948, the partners agreed to sell all the business of the firm to the Amalgamated Development Limited, which company was promoted by the partners of the firm for a consideration of Rs. 34,99,300. The purchase price of Rs. 34,99,300 was comprised of various items which were shown in the Schedule to the agreement. Price of land and goodwill was shown as Rs. 12,68,628 and Rs. 2,50,000, respectively. The agreement provided- as follows: "(1) The Vendors do hereby agree to sell and the Company do hereby agree to purchase All That the said business with effect from the eighth day of July one thousand nine hundred and forty- eight together with the goodwill of the said business and all stock in trade, fixtures, tools, implements, furniture, fittings and all other articles and things belonging to the said business or in anywise used in the same including the benefit and advantages of all contracts. (2) The purchase price shall be Rupees Thirty Four Lacks Ninety Nine Thousand and Three Hundred paid and satisfied by the company allotting to the vendors or their nominees Seventeen Thousand Five Hundred redeemable Preference shares of Rupees one Hundred each and Seventeen Thousand Four Hundred and Ninety Three ordinary shares of Rupees one Hundred each in capital of the company which will be accepted by the Vendors in full satisfaction of the said purchase price. (5) The company shall undertake and discharge all debt and liability of the Vendors including development expenses such as opening out roads, laying out drain and sanitary arrangements
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providing electricity in the areas and providing a school in Toilygunge for education of children for which the Vendors have given an undertaking to the Toilygunge Municipality and also the liability of the Vendors in respect of the deposit made with them by various intending purchasers of lands but excluding the liabilities of the Vendors for Income-tax Super Tax or any other tax or duty on Income or revenue in respect of the profit of the business." The sum of Rs. 34,99,300 was arrived at in the Schedule that- 1. Land Rs. 12,68,628 7 7 2. Good will Rs. 2,50,000 0 0 3. Motor Cars and Lorries Rs. 25,866 8 6 4. Furniture, Fixture etc. Rs. 5,244 5 6 5. Mortgage secured Rs. 17,62,367 6 0 6. Deposits for purchase of land Rs. 53,500 0 0 7. Advance paid to Pleaders Solicitors, Contractors stall and 8. Other outstandings Rs. 1,83,622 3 6 Cash and Bank Rs. 71,800 1 8 Rs. 36,21,029 0 9 LESS LIABILITIES Rs. 1,21,729 0 9 Rs. 34,99,300 0 0 The consideration of Rs. 34,99,300 was paid by allotment of 17,500 Redeemable Preference shares of Rs. 100 each and 17,493 Ordinary shares of Rs. 100 each, the allotment being to the Vendors Partners or their nominees. Thus the Vendors received shares of the face value of Rs. 34,99,300 for the assets transfer to the company. The Income-tax Officer held that the sum of Rs. 2,50,000 was actually charged by the Vendors as lump sum amount of profits on sale of valuable stock-in-trade and not goodwill as alleged. However, the Appellate Assistant Commissioner on appeal, held that the said sum of Rs. 2,50,000 was the value of the goodwill. He further held that since the transfer was transfer of business as going concern, the profit was the capital gain and, therefore, not liable to tax. Relying on Doughty v. Commissioner of Taxes 1927 A C 327, he held that as "the transfer is a transfer of all assets of the firm to a company the transfer is capital sales". This led the Income-tax Officer to file an appeal before the Appellate Tribunal. The Appellate Tribunal held that although the sale was the sale of a business as a going concern the value of the stocks could be traced, and, therefore, the profits arising out of the sale was taxable income. Regarding the goodwill the Tribunal…
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