P L D 1973 Lahore 843 (PLP)

MUSHTAQ HUSSAIN, J.

‑Messrs Haji Abdul Majid Khan Zaman & Co., Burowala, a registered firm, carried on business in Cotton Ginning and manufacture of vegetable ghee, oil, soap, Ice etc. On 31‑3‑1959, a private limited company of the same name was floated and the assets of the above‑named firm were transferred to this new company. The assets were valued at Rs. 34,17,568 and their written down value at the time of transfer was Re. 32,34,

141. The private limited company comprised the same shareholders as were partners in the firm and shares were allotted to them in the same proportion in which they owned the partnership firm. Re. 1,83,427, the difference between the value of the assets transferred and their written down value was treated by the Income‑tax Officer as profit and charged to tax for the charge year 1961‑

62. A boiler which had cost the assessee Re. 76,875 was transferred to the company at the market price of Re. 2,91,

875. The difference of Re. 2,15,000 was also added by the I.T.O. to the assessable income of the respondent. The assesses felt aggrieved and appealed to the Income‑tax Appellate Tribunal which by its order dated 30‑4‑1965 accepted the appeal and held that the first "transaction did not result in what the commercial men will call a sale and, therefore, the surplus of the transfer value over the written down value could not be taxed under the law". It also held that the amount of Re. 2,15,000 on account of the sale of boiler was also not taxable because this was also not a sale. The Commissioner of Income‑tax was not satisfied with this adjudication and at his instance the Income‑tax Appellate Tribunal by its order dated 26‑5‑1966 referred the following question of law to us for opinion:‑ Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the surplus arising to the assesses‑firm on transfer of assets to the successor company was not taxable under the second proviso to section 10(2)(vii). The answer to the question depends upon the Interpretation of the expression "sale". The Tribunal has come to the conclusion that it is not a sale and in arriving at it has relied upon their own decision reported in (1963) 7 Taxation 57, as well as on Rogers & Co. v. Commissioner of Income‑tax, Bombay City II ((1958) 34 I T R 336) and Commissioner of Income‑tax, Bombay v. Sir Homi Mehta's Executors ((1955) 28 I T R 928). The report of the decision of the Tribunal shows that they have not come to an any independent conclusion of their own reasons advanced by them but has chosen to accept the conclusions arrived at in the two other cases named above and to pass an order accordingly. In the Rogers & Company's case the assessee was a firm. On 6‑8‑1949 a new private limited company was formed with a view to take over the business of the assesses‑firm. The only shareholders in the company were the partners of the firm and the Income‑tax Officer had acted in the same manner as in the case before us. The Division Bench of the High Court which decided the case started by observing that

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 & Co., to the private limited company of Messrs Rogers & Co. Ltd. If there was a sale, then the second proviso is attracted and the assesses‑company is liable to pay tax on the difference between the written down value and the cost price. The way their Lordships' mind worked in arriving at a decision may be gauged from the following :‑

The assets of the firm now belong to the company. No change has taken place except the legal change of a company taking the place of a firm. Under these circumstances, can it be said that there is a sale by the firm to the company which attracts the application of the second proviso to section 10(2)(vii)? Now, it is elementary that a person cannot sell to himself in favour 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 . . . . . If he transfers it to himself, he cannot make profit either real or notional. Their Lordships were, therefore, of the view that this was a sale by a person to himself. With the greatest respect for this view we are unable to subscribe to their Lordships' opinion. A company registered under the Companies Act is a person. The shareholders of that company do not own anything owned by the company. Sales to the company are not sales to the shareholders. The property of the company is not the property of the shareholders. We may refer to the time honoured decision of the House of Lords in Aron Salomon v. A. Salomon & Company Ltd. (1897 A C 22). In that case a trader by the name of Aron Soloman sold a business to a limited company with a nominal capital of 40,000 shares of 1 each. The company consisted only of the vendor, his wife, a daughter and four sons who subscribed to one share each. At page 30, their Lordships observed:‑-- I observe that the learned Judge (Vaughan Williams, J.) held that the business was Mr. Salomon's business, and no one else's, and that he chose to employ as agent a limited company; and he proceeded to argue that he was employing that limited company as agent, and that he was bound to indemnify that agent (the company). I confess it seems to me that that very learned Judge becomes involved by this argument in a very singular contradiction. Either tine limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was not, there was no person and nothing to be an agent at all; and it is impossible to say at the same time that there is a company and there is not. Their Lordships repelled the contention that the company was only an alias for Solomon. One of the learned Judges observed:‑ Under these circumstances, I am at a loss to understand what is meant by saying that A. Solomon & Co. Limited, is but an "alias" for A. Solomon. It is not another name for the same person; the company is ex‑hypothesi a distinct legal persona. Another Noble Lord expressed himself as follows :‑

I cannot understand how a body corporate thus made "capable" by statute can lose its individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. The company is at la v a different person altogether from the subscribers to the memorandum; and, though It may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment. If the view of the learned Judge were sound, it would follow that no common law partnership could register as a company limited by shares without remaining subject to unlimited liability. It is, therefore, quite clear that once a company has been duly incorporated under the Companies Act It becomes a person different from its shareholders. These very shareholders in the Instant case were the partners in the firm of the same name. They transferred the property of the firm to the company and we have seen that they were not the company, therefore, the transfer was by the persons in the firm to the other legal personality, that is, the corporation which had been brought Into being under the Companies Act. The ingredients of a sale, that is, transfer of the property by one person to another for e consideration were all present and the mere fact that the partners of the late firm were the only shareholders of the corporation would not, we respectfully say, detract from the independent legal personality of the corporation. We may in this connection refer to John Foster & Sons Limited v. The Commissioners of Inland Revenue ((1894) 1 Q B 516). By deed between the eight partners composing a firm of the first eight parts and a limited company of the ninth part, it was recited that the partners were desirous that their business should be reconstructed as a limited company and had agreed that the whole of the undertaking, property and liabilities of the firm should be transferred to a company to be formed of all the partners in the firm exclusively, for the purpose of taking over the same; and there should be allotted amongst the partners, in proportion to their shares in the partnership, the whole of the shares In the company. It was held that:‑-- The deed was a transfer of property from individuals to a corporation in consideration of "stocks or securities" within the meaning of section 71 of the Stamp Act, 1870, and accordingly was a "conveyance on sale" . . . . . and was none theless so because the eight partners who conveyed the property were also the Individuals who constituted the corporation. Lindley, L. J. on appeal observed‑ "Pausing there for a moments although the persons of the first eight parts may be, and were members, and the only members, of John Foster & Co. Limited, John Foster & Co. Limited, is not those eight individuals ; John Foster & Co. Limited, is a corporation. We have accordingly two parties one party consisting of several Individuals, and the other party consisting of a corporation. Whether they are or are not the members, or the only members of the corporation, is wholly immaterial. The corporation is a totally different person from them in any capacity you choose to assign to them except a corporate one. (The Lord Justice then stated the recitals In and the operative part of the conveyances, and continued:‑) Then the parties of the first eight parts put their seals to the Instrument, and the company put its seal to it. Noun, what is that instrument? It is certainly a conveyance of property that is obvious. In order to amount to a conveyance of property there must be a person conveying and a person taking, and you have them both here. The persons conveying are the persons named in the first eight parts, and the persons taking are the corporation named in the ninth part. Now, what is the consideration? The consideration for the transfer of this property is, I agree, not money, but it is stocks and securities, which for this purpose are to be regarded as equivalent to money by reason of section 71 of the Act to which I have already alluded. Then what have we got? To sum it shortly, it is a conveyance of property from one person to another, for money, or what is, according to the provisions of the statute, equivalent to money. What is that except a conveyance on sale? What else can you call it ? It is certainly not a gift; it is not an exchange ; it is not a partition; it is not a mortgage. I do not know what it is unless it is a conveyance on sale. I do not know what is necessary to constitute a sale, except a transfer of property from one person to another for money, or for the purposes of the Stamp Act, for stock or marketable securities. But then it is argued that it is only a redistribution of property. I do not consider it a redistribution at all. It is an entire transfer of property from one set of people to another person altogether, and whether there are, as there may well be hereafter, additional persons taking shares in this company, is perfectly immaterial." Reference may also be made to J. & P. Coats v. Commissioners of Inland Revenue ((1897) 1 Q B D 778) :‑ I turn to the first paragraph of the agreement, and I find there that what the parties agreed to do was that the parties of the second part "shall use their best endeavors to procure all the holders of ordinary and preference shares of James Chadwick & Brother Limited, to sell and dispose of their shares to J. & P. Coats Limited." The words are "sell and dispose" of them. There could not be stronger words than those. It was to be a sale and disposition of property, not for money, but "in exchange for fully paid‑up preference and ordinary shares of J. & P. Coats Limited. "But it was a sale out and out. Instead of taking money for these shares the shareholders were to take the shares of J. & P. Coats Limited, and that is what they agreed to do." Salmond in his celebrated book on Jurisprudence observed at p. 360 of the Eleventh Edition that‑

It is essential to recognize clearly that in neither of these forms of incorporation is the legal person identical with any single human being company is in law something different from its shareholders or members. The property of the company is not in law the property of the shareholders. In all these respects a corporation is essentially different from an unincorporated partnership. A firm is not a person in the eye of the law; it is nothing else than the sum of its individual members. There is no legal entity standing over against the partners, as a company stands over against its shareholders. The property and debts of the firm are nothing else than those of the partners .The incorporation of a firm‑that process by which an ordinary partnership is transmuted into a company‑effects a fundamental change in the legal relations of its members. It is nothing else than the birth of a new being, to whom the whole business and property of the partnership is transferred‑a being without soul or body, not visible save to the eye of the law but of a kind whose power and importance, wealth and activity, are already great, and grow greater every day." See also the following in para. 11, page 9, of Halabury's Laws of England, III Edition, Vol. 9 :‑-

11. Corporation of a distinct entity.‑The nature of a corporation may be shown by contrasting it, as a legal conception, with the individuals or mass of individuals In which it resides. In law the individual corporators, or members, of which it is composed are something wholly different from the corporation itself; for a corporation is a legal persona just at much as an individual. If a man trusts a corporation, he trusts that legal persona, and must look to its assets for payment; he can only call upon individual members to contribute if the Act or charter creating the corporation has so provided. The liability of an individual member is not increased by the fact that he is the sole person beneficially interested in the property of the corporation, and that the other members have become members merely for the purpose of enabling the corporation to become incorporated and possess but a nominal interest in its property, or hold their interest In trust for him Notice to an individual who happens to be a member of a corporation aggregate, and has not authority to receive notices, is not equivalent to notice to the corporate body and where an action is maintainable by and in the name of a corporation, it cannot be maintained by individual members of the corporation. After the dissolution of a corporation the members, in their natural capacities, can neither recover debts which are due to the late corporation nor be charged with debts contracted by it. The reasoning advanced in the Rogers Company case is also the same as in Sir Homi Mehta's case and Doughty v. Commissioner of Taxes (1937 A C 327). We are, therefore respectfully of the view that the transaction has all the components of a sale and would therefore, accept the reference, answer the question in the negative, but in the circumstances of the case shall make no order as to costs. Reference accepted.