MESSRS. ASSOCIATED CLOTHIERS LTD. vs. COMMISSIONER OF INCOME-TAX, CALCUTTA

CIVIL APPEAL No. 969/1965Supreme Court[1967] 1 S.C.R. 51223 September 1966Bench: 3 JudgesAuthor: J.C. SHAH, V. RAMASWAMI, VISHISHTHA BHARGAVA ASSOCIATED8 pages
AI SummaryDismissed

What were the facts?

The appellant, Messrs. Associated Clothiers Ltd., formerly Phelps & Company Ltd., changed its name on March 21, 1952. On the same day, a new company, Messrs. Phelps & Co. Ltd., was incorporated. The appellant company entered into an agreement to transfer its assets, including a building, to the new company. The consideration included cash and shares of the new company, with the new company taking over the appellant's liabilities. The building's original cost was Rs. 97,252/-, its written-down value was Rs. 57,011/-, but it was valued at Rs. 2,24,573/- in the balance sheet and the agreement. For the assessment year 1952-53, the Income-tax Officer taxed the difference between the original cost and the written-down value of the building under Section 10(2)(vii) of the Indian Income-tax Act, 1922, treating it as profit. The Income-tax Appellate Tribunal initially ruled in favour of the company, but the High Court reversed this decision.

What did the Supreme Court hold?

The Supreme Court held that the transaction was a sale by one company to another, not a case of individuals readjusting their business positions by floating a company. The Court found that the sale was for a stated consideration, which was not shown to be notional. Since the consideration exceeded the original cost of the building, the difference between the original cost and the written-down value was considered profit within the meaning of the second proviso to Section 10(2)(vii). The Court distinguished cases relied upon by the appellant, such as Sir Homi Mehta's Executors and Rogers & Co., and relied on the principle laid down in Chittoor Motor Transport Co. (P) Ltd. The Court also noted that the argument regarding the transaction being nominal or that the property in shares remained with the same company was not raised before the Tribunal. The appeal was dismissed.

What were the issues?

1. Whether the sale of assets by the appellant company to Messrs. Phelps & Co. Ltd. was 'in substance to self', rendering Section 10(2)(vii) of the Indian Income-tax Act, 1922, inapplicable. The assessee contended that the transaction was 'in substance to self' and therefore no profit arose. The revenue argued that the transaction was a sale between two distinct entities. 2. Whether the difference between the original cost and the written-down value of the building, when sold for a consideration exceeding the original cost, constitutes profit taxable under the second proviso to Section 10(2)(vii) of the Indian Income-tax Act, 1922. The assessee argued that the transaction was nominal and that the property in the shares remained with the same company, or that there was no evidence of market value exceeding the written-down value. The revenue contended that the transaction was a sale for consideration, and the difference was profit.

Which sections of the Income-tax Act were involved?

Section 10(2)(vii),Section 11(4),Section 66A(2)

AI-generated summary — verify with the full judgment below

MESSRS. ASSOCIATED CLOTlllERS LID. v. COMMISSIONER OF INCOME-TAX, CALCUTTA September 23, 1966 A (J. C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.] B Indian lncome·ta:c Act, 1922 (II of 1922), s. 10(2)(vii)-Sale o/ assets by one company to another--Circumstances in lvhich sale can b~ treated as "in substance to se/f'-App/icabi/ity o/ s. 10(2) (vii) to such transaction.

The appellant a private limited company, was originally registered as "Mis. Phelps & Company Ltd." but on March 21, 1952 .. by an order under C s. 11 ( 4) of the Indian Companies Act, 1913, its name was changed to "Messrs Associated Clothiers Ltd."

On the same day a company styled "Messrs. Phelps & Co. Ltd." was incorporated.

By a written agreement, also of the same date, the appellant company agreed to transfer its assets to Messrs Phelps & Co. Ltd. Consideration for the transfer consisted, apart from cash, of allotment of certain shares of Messrs Phelps & Co. Ltd, to the appellant and the taking over of the latter's liabilities by the former.

Among the assets transferred under the agreement was a building describ- D ed in the second schedule to the ai:reement.

The original cost of this buil

The order continues below.

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