1990 PLP (Trib (PTD)

MIRZA MUHAMMAD WASIM (ACCOUNTANT MEMBER).‑‑‑This is an appeal by an individual against the orders of the C.I.T. (Appeals) Zone I, Lahore, dated 30‑4‑1986 relating to the assessment year 1983‑

84. During the said year the assessee an individual, was a director of a private limited company by the name of Messrs Raja Enterprises Limited, Lahore. Prior to the assessment year 1983‑84 the assessee was carrying on business as a property dealer/developer and estate agent. The only issue involved in the assessee's appeal relates to the inclusion of Rs.22,16,005 in his income from the alleged sale of plots to Messrs Raja Enterprises Ltd. which action of the I.T.O. was upheld by the learned C.I.T, (Appeals). The facts in this regard are that for the assessment year 1983‑84 a return was filed by the assessee declaring income of Rs.40,000 from salary only. In his order under section 62 of the Income Tax Ordinance the I.T.O. wrote that the assessee had declared Plots Nos.86 and 87, C‑II Gulberg III, Lahore in the wealth statement as on 30‑6‑1982 showing their value at Rs.27,83,

905. The Income‑tax Officer wrote that both these plots were transferred in the assessment year 1983‑84 to the limited company, Messrs Raja Enterprises Ltd. for a consideration of Rs.50,00,

000. The I.T.O. further wrote that the assessee had thus ' earned a profit of Rs.22,16,005 (calculated less by Rs.90) as a result of the sale of the plots which he had failed to declare in return and with regard to which a notice under section (sic), 8‑12‑1985 of the Ordinance was issued to the assessee which is reproduced in the assessment order as under:‑‑ "Your statement of assets and liabilities as on 30‑6‑1982 disclosed among other assets, the value of 2 plots of land viz. Nos.86 and 87, C‑II, Gulberg‑III, Lahore of Rs.27,83,905 both these plots were disposed of/transferred in the period relevant to the assessment year 1983‑84 to Messrs Raja Enterprises Limited for Rs.50,00,

000. Raja Enterprises Limited is a Private Limited Company of which you are Managing Director and you hold the majority shares alongwith your family members. The company constructed a commercial plaza over the said plot. The construction was finalized on 22‑8‑1984. By the sale of the aforesaid plots you made a profit of Rs.22,16,005 in a span of 8/9 months from the very inception you had the intention of making profits out of these plots. The history of your case shows that you have been acting as a Property Dealer/Developer. The facts of your case make it crystal clear that your intention from the very beginning was to develop the land and to construct a commercial plaza thereon for making profit immediately after acquiring the plots you got them commercialised by paying a fee of Rs.8,00,000 or so to the Lahore Development Authority (L.DA.). Keeping in view all the attended facts vis- -vis short term investigation, intention to resale and to have the plots commercialised and build the commercial plaza thereon make the transaction as an adventure in trade. I intend to assessee this profit of Rs.22,16,005 in your hand as your income from business. You are, therefore, called upon to please explain within three days of the receipt of this notice as to why this amount of Rs.22,16,005 should not be assessed in your hands and your profit from the business of the sale of the abovementioned plots." The assessee furnished a reply dated 12‑12‑1985 which has been reproduced in the assessment order as under:‑‑ "In response to your pre‑emptory notice demanding a reply within three days alongwith the case is one of S.N.F.B. and comes within the special procedure of assessment, besides being under an interdiction because of writ pending before Lahore High Court, we respectfully beg to state:‑‑ (1) A precisely similarly query was raised by your learned predecessor‑in‑office in his No. Cent‑III, dated 3‑1‑1985 and it was replied in our No.1568/A‑I/021, dated 8‑1‑1985. Your attention is drawn to this correspondence. (2) Your presumption that the transaction of transfer of the running business (assets as well as liabilities) was conceived as early as the purchase of the plots and earlier to the incorporation of the company on 3‑11‑1982, is without any basis. Thus, the sale of the plots to the company, do not constitute business as it is a non‑repetitive of intent to make profit at the time of adventure in the nature of trade as the necessary ingredient of intent to make profit at the time of purchase is not provable solely because the assessee was a property dealer at that moment. Even a property dealer has a right to make investment in property as an investment. The fact that the plots were used for building a Plaza by the limited company of which the assessee is a Managing Director does not show the intent or purpose of the individual who is a different entity from the company. In fact the sale of the business of the assessee clearly shows his total severance from business as individual. Thus, the transaction under consideration loses its character of adventure in the nature of trade. Attention is invited to the principle laid down in Hudson Bay Co. 5 T.C. 424/437. (3) Further in order to come within the ambit of income‑tax, the receipt must partake the nature of `income' as defined in section 2(24) besides flowing from an activity known and defined as `business' as per section 2(II). And the first condition for exclusion is a casual non‑recurring receipt of a non‑commercial nature. Authority for this obvious proposition is H.L. decision in the celebrated Styles case reported as 3 T.C. 1985. (4) Finally it may be submitted that it is not the profit or loss in a transaction which matters. Even a scheme for profit making would not turn a receipt into profit, if the seller is merely realizing the gain out of the enhancement of the value of an investment. (Californian Copper Syndicate Ltd. v. Harris 5 T.C.159,166.). (5) For the abovementioned reasons, the transfer of assets and liabilities to the limited company particularly where the limited company is a family concern of the assessee himself can hardly be termed as business. Or the accretion therefrom as profit, as it will run counter to the basic principle that one cannot make profit out of one's ownself, if the family company is equated with the dominant individual. And if the two entities are considered different and independent of each other, which in fact they are then the only conclusion is that the assessee has finally gone out of business and the final transfer of his assets and liabilities can only be considered as disposal of business and not a routine property transaction of a property dealer. For all these reasons the reasoning in your letter under reply is untenable and you are requested to reconsider the matter in the light of the submissions made. "Opportunity of hearing is requested." The I.T.O. wrote that the assessee's plea that a writ petition was pending before Lahore High Court was not correct because the stay had been vacated by Lahore High Court. He further wrote that similar queries had been raised vide an earlier letter of the I.T.O., dated 3‑1‑1985 to which a reply was furnished on 8‑1‑1985 which was as under:‑‑ (1) "Raja Riaz Ahmed was carrying the business of an estate agent till 30‑6‑1982 when this business was discontinued. (2) A Private Limited Company was floated by Raja Riaz Ahmad alongwith his immediate family members. In accordance with clause 4 of the Pre‑Incorporation Agreement, Article 2 of the Memo and Articles of the Articles of Association the company on incorporation was obliged to take over the running business of the assessee with all its assets and liabilities at a mutually agreed value. (3) The proposed company took over the business above mentioned for the interim period till the incorporation formalities were finalized on 3‑11‑1982. (4) That by its Resolution No.4 dated 4‑11‑1982 the company in conformity with its commitments mentioned above evaluated and took over the assets and liabilities of the running business of the assessee including the good will. (Copy of Resolution enclosed). (5) That in this evaluation liabilities worth Rs.41,00,000 (Forty‑one Lacs only) were taken over against the assets (consisting of plots 86‑87/C‑II, Gulberg‑III, which were evaluated at Rs.50,00,000 (fifty Lacs). The assessee was issued shares of the face value of Rs.8,00,000 (Eight lacs). (6) That in the circumstances stated above it is factually incorrect to say that the assessee sold his plots worth Rs.22,16,005 or Rs.30,87,832 for Rs.50,00,000 and thus received a profit on his business of estate dealing which ought to have been declared in 1982‑83 charge year. (7) That according to well‑established rule of law, the criterion of chargeability is the profit making motive where the transaction is conceived as a part of a scheme of profit‑making. Hence the assessee found that he could no longer carry on the business as a lone operator. It had become extensive. So all he did was transfer as Hudson Bay Co. Ltd. v. Stevens (5 T.C. 424) is applicable to the facts of this case, according to which no taxable profit accrues on sale of property by an owner. (8) Looking from another angle, the difference between the value of assets and liabilities is not taxable because(a) it is casual non‑recurring receipt if it is considered a revenue and not a capital receipt, and (b) what is taxable is a commercial profit and not excess realization of capital assets. (9) The fact cannot be ignored that effective from 1st July, 1982 when the pre‑incorporation was signed and the proposed company took over, the assessee was under an obligation not to indulge in a business that could be competitive with the company. Therefore, he went out of business, so far as his individual capacity was concerned. Therefore, the sale of his business to the company constituted complete stoppage of business after 1‑7‑1982. Even the deeming provision will not be of much help to the department, because they predicated to bring to charge what had been allowed earlier in the shape of admissible allowance from the taxable profits. (II) Expenditure statement was filed with my letter dated 29‑5‑1984." After reproducing the assessee's explanations as above the I.T.O. wrote that the assessee's main point was that there was no intention of earning any profit on the sale of the plots and that there was no need to earn any such profits because the Managing Director and the Directors of the Company, Messrs Riaz Enterprises Ltd. were the members of the same family. The I.T.O., however, observed that the assessee's explanation was not convincing because if there was no difference between the previous owner of the plots i.e. Raja Riaz Ahmed and the company viz. Messrs Raja Enterprises Ltd., there was no point in recording higher price of the plots as compared to the purchase price while recording the transfer of the plots in the company's name. The I.T.O. wrote that thus instead of showing the value of the plots as Rs.50,00,000 it could have been shown at the original purchase price. The I.T.O. further noted that the assessee's A.R. had referred to the principles laid down in the case of Hudsons Bay Company 5‑TC‑424/437 but observed that the principles were not applicable in the assessee's case. He wrote that the circumstances in the instant case made it absolutely clear that the intention behind the transfer of the plots to the Company was to earn profits. The I.T.O. pointed out that the company had in fact constructed commercial plaza over the plots and the construction finalized on 20‑8‑1984. He wrote that by sale of aforesaid plots the assessee had made profit of Rs.22,16,005 and that from the very beginning the assessee had no intention of holding the plots as an investment. The I.T.O. wrote that the assessee was a property dealer and developer and all along he had been assessed on income from this source. In this connection the I.T.O. further wrote as under:‑‑ "His intention from the very beginning was to develop the land and to construct a commercial Plaza thereon for making profit. Immediately after acquiring the plots he got them commercialised by paying a fee of about Rs.8,00,000 to the Lahore Development Authority (L.DA.) Keeping in view all the attendant facts viz. the short term investment, the intention to resale and to have the plot commercialised and to build a commercial plaza thereon made the transaction as an adventure in trade. In the light of these facts the assessee's explanation is nothing but a cock and bull story which cannot be accepted. There are numerous reported cases, which support the view that a transaction completed under such circumstances will be considered as an adventure in the nature of trade. The instances of these cases are cited as under;‑‑ (1) 1959/35I.T.R.595. (2) 1963/47 I.T.R. 337/1967/15 Taxation

21. In a case existing at National Tax No.07‑09‑1444156, the learned ITAT Lahore relied on a case of Supreme Court of India cited as 1959/35 I.T.R., in which it was held that even a solitary transaction with intention of making profit makes the transaction as an adventure in the nature of trade. In the light of all these facts there remains absolutely no doubt that the sales of the plots mentioned above made by the assessee was an adventure in the nature of trade. The profit of Rs.22,16,005 made by the assessee in this transaction was therefore, assessable in the assessee's hands in the year 1983‑84 which the assessee has not declared. This is a clear cut concealment of correct income. The amount of Rs.22,16,005 is assessed in the assessee's hands in the year under consideration."

2. With the above observations the I.T.O. added income from sale of plots amounting to Rs.22,16,005 to the assessee's income from salary and thus assessed the income of the assessee for the assessment year 1983‑84 at Rs.22,61,

605. In his appellate order the learned C.I.T.(A) wrote that it was argued by the learned counsel for the appellant that while disposing of the business in its entirety the appellant was selling his property and was not trading and that after the sale of his entire business to the company the assessee did not continue his business as an estate agent. It was also statedly argued before the C.I.T. (Appeals) that the judicial decisions referred to by the I.T.O. were not relevant in the assessee's case because none of the cited cases was a case of disposal of entire business with the vendor going out of that business. According to the C.I.T. (Appeals) it was further contended by the assessee that intention to make a profit was not a determining factor in making a transaction as a business or trade or even an adventure in the nature of the trade and that in short it was contended that the sale of plots was in the capacity of an owner and not as a. trader. The learned C.I.T. (Appeals) further wrote in his order as under:‑‑ "The learned counsel has tried to press the point that after the transfer of plots the company assessee ceased to act as an estate agent and that as such the transaction did not constitute an adventure in the nature of trade. A finding will have to rest on the facts of the case. Before transferring the plots to the company and becoming its Managing Director, the assessee was admittedly acting as an estate agent and there was every reason to believe that he wanted to develop the said plots and construct a commercial plaza thereon for this purpose he got the plots commercialised by paying a heavy fee of Rs.8,00,000 to L.DA. All these. preparations were complete when he transferred the plots to the company at the profit. Instead of constructing the plaza himself the job was done by forming a Ltd. Company which was quite distinct from his own entity. The contention that it was the business as a whole which was transferred to the Ltd. Company appeared to be a smokescreen. The real transaction was the transfer of the plots to the company at a profit and in the facts of the case it appeared to be a clear case of an adventure in the nature of trade. The Income‑tax Officer was accordingly justified to assess the profit and the objection raised is rejected." After rejecting the assessee's plea the learned C.I.T.(A) however, observed that the assessee had further contended that he had purchased S.N.F. Bonds which fact was duly intimated to the I.T.O., who, however, failed to follow the procedure laid down in C.B.R. Circular No.9 of 1985. The C.I.T. (Appeals) wrote that the matter was simple and the I.T.O. would obtain necessary information from the assessee‑appellant and take such action as was admissible under the law

3. Before us the assessee's grounds of appeal read as under:‑‑ (1) The learned C.LT. (Appeals) erred in law to brush aside the legal evidence on record supporting the conclusion that the appellant sold his entire running business and not only the Plots Nos.86‑87 to the Vendee Company. (2) That specifically the learned C.I.T. (Appeals) ignored Annexure (A.I.)(i) The pre‑incorporation agreement. (ii) The Memorandum and Articles of Association of Vendee Co. (iii) The Resolution taking over the running business of the appellant. His conclusion that the transaction of transfer of the entire business was a smokescreen is thus contrary to the evidence on record. It is as such untenable in law. (3) That the learned I.T.O. and C.I.T. (Appeals) ignored the rule of law that the apparent is the real state. They did not discharge the onus to prove that the transaction in question was not a sale of business (as supported by evidence) but a mere sale of plots as alleged by them. The impugned order is therefore, a nullity in law. (4) That the impugned orders are contrary to facts and law. As such the addition of Rs.22,16,005 and confirmation of this addition is untenable in law. Apart from the other points contained in the above grounds of appeal the main contentions of the learned counsel for the assessee before us were two‑fold viz. firstly that it was the entire running business of Raja Riaz Ahmed which had been taken over by the company Messrs Raja Enterprises Ltd. and that no sale of the plots as such was involved in the arrangement and secondly the value of the plots shown at Rs.50,00,000 in the balance‑sheet of Raja Enterprises Ltd. was based on a revaluation of the said assets and in no way represented any purchase price paid by Messrs Raja Enterprises to the assessee. It was further pointed out in the context of the latter contention that the assessee and members of his immediate family i.e. his wife and children were the only Directors and share‑holders of the limited company and that no profit could be attributed to the assessee as a result of the take‑over of his individual business by the limited company since this would amount to inferring that the assessee had earned a profit on a transaction with himself. It is also pointed out by the learned counsel that the assessee only received shares of the face value of Rs.8.00.000 in the company as a result of the arrangement which, it is reiterated. involved only a book entry of Rs.50,00,000 with respect to the plots to reflect a better financial condition of the company for purposes of obtaining loans etc. In support of his contentions the learned counsel for the assessee also quoted the following decisions of the superior Courts of Pakistan and India and a decision of the Privy Council:‑‑ (a) (1964) 9 Tax 39 (High Court India), (b) (1965) 11 Tax 144 (High Court India) (c) (1969)19 Tax 209 (Karachi High Court), (d) 1966 P T D (Trib.) 9, (e) (1975) 32 Tax 261 (Madras High Court India), (f) (1977) 24 Tax 212 (High Court), (g) P L D 1974 Kar. 6 (High Court),. (h) (1968) 17 Tax 67 (High Court), (i) P L D 1978 Lah. 374 = 1978 PTD 145, (j) (1927) JC 327 Privy Council. The learned D.R. on the other hand reiterated the Departmental position that the arrangement involved a business transaction resulting in a profit to the assessee. Emphasis was in this connection laid by the learned D.R. on the fact that the assessee had been carrying on a business as a real estate agent and that the plots in question had obviously been purchased by him in connection with his business. In this connection it was also pointed out that the assessee had spent over Rs.8,00,000 in order to have the plots redesignated as commercial land which showed that their acquisition was for purposes of assessee's business. It was also pointed out that plots were held for only a short period before these were sold to the limited company which again showed that a business transaction and not the sale of an‑ investment. It was also pointed out by the D.R. that the fact that the transaction was a solitary one did not change its nature which remained that of a commercial transaction. The learned D.R. also disagreed with the contention of the learned counsel that since the assessee and his immediate family were the sole share‑holders of the limited company no profit could be considered to accrue to the assessee out of the transaction which amounted to a transaction with himself. The learned D.R. maintained in this connection that the assessee and the limited company were separate entities and the assessee's transaction with the company could not be considered as dealings with his own self. In support of the contention that a solitary transaction could be treated as a business transaction the learned D.R. relied on the Supreme Court of India judgment in the case of G. Ventakataswami Naidu and Company v. Commissioner of Income‑tax reported as (1959) 35 1.T.R.

594. It was further pointed out that the plots in question were in fact the stock‑in‑trade of the assessee as was brought out in decisions of the Indian superior Courts reported as (1975) 100 I.T.R. 177 and (1977) 107 I.T.R.

716. It was further stated by the learned D.R. that although in the Tribunal's decision reported as 1984 P T D (Trib.) 127 the onus of proving that an isolated transaction constituted an adventure in the nature of trade was held to lie on the department this onus could be considered as having been discharged on the facts and circumstances of the case.

3. We have considered the rival arguments and would first of all observed that the Department's view that the plots in question were apparently acquired by the assessee for purposes of business and constituted his stock‑in‑trade appears to correct. This view is supported by the fact that the assessee had been acting as an estate agent and developer and had obviously acquired the plots for business purposes. He further spent a sum of Rs.8,00,000 to convert the plots into commercial property which also obviously indicated a profit motive. In fact it is the assessee's own contention that the plots were the only assets of the business which were stated to have been taken over by the company. It may also be noted that the assessee's own contention in his reply to the I.T.U, dated 8‑1‑1985 reproduced above was that the assessee found that he could no longer carry on the business `as a lone operator'. This clearly implies that though the assessee had purchased the plots for purposes of development and sale of a commercial building (a job subsequently dope by Messrs Raja Enterprises Ltd.) he found that I the undertaking was too large for him to handle as an individual, which however does not alter the obvious position that the plots were purchased by the assessee with a profit motive. The plots could therefore, not be viewed as anything other than the assessee's stock‑in‑trade which was subsequently acquired by Messrs Raja Enterprises. We must however, hasten to add that this does not by itself, clinch the issue in the Department's favour. The main argument of the learned counsel for the assessee as already indicated earlier, in fact seemed to be that no sale of the plots had actually been made by the assessee to the limited company which latter had taken over the entire running business of the assessee and had only revalue the plots for the purposes of its own balance‑sheet. It was also argued by the learned counsel, as we have already noted, that since the company was owned entirely by the assessee and his wife and children he could not be considered to have made any profit from himself. Some of the cases quoted by the learned counsel in support of the assessee's case were not found to be quite relevant. For instance in the case reported as (1965) 11 Tax 144 decided by the Gujrat High Court (India) the difference between the book value of the assets in the hands of the assessee‑company and the written down value in the hands of the vendor was considered by the I.T.O. to be a profit in the hands of the assessee‑company. This was not found to be justified by the Indian High Court but obviously in the case before us the profit has not been taxed in the hands of the purchasing company but in the hands of the so‑called vendor. In the case reported as 1966 P T D (Trib.) 9 the assessment was set aside with the direction that it should be verified whether the assessee was carrying on a business or was deriving income from other sources. It was held by the Tribunal that profit under section 10(2)(vii) of the repealed Income‑tax Act could only be worked out if the income was assessable as business income under section 10 of the repealed Act. This case again has obviously no direct relevance to the assessee's case. Similarly, the case reported as P L D 1974 Kar. 6 was again not relevant as a similar finding was given in this case also with respect to profit under section 10(2)(vii) vis‑a‑vis income under section 12 of the repealed Income‑tax Act. The case reported as (1968) 17 Tax was also not quite comparable because there machinery had been sold without being used and profit under section 10(2)(vii) was thus held not to have arisen. The decision of the Madras High Court in the case of Kasturi and Sons Ltd. reported as (1975) 32 Tax 265 is, however, found to be more relevant although in that case the news print sold or transferred was considered to be raw material and not strictly stock‑in‑trade because the assessee was a printer and not a dealer in news print. The case which appears to be a most relevant to the assessee's arguments, however, is the Karachi High Court judgment reported as (1969) 19 Tax 209 in C.I.T. v. Public Industries quoted by the learned counsel. In this judgment the Honourable High Court has also considered and quoted several other judgments of superior Courts which too seem to be relevant to the assessee's arguments. We therefore, intend to consider the Karachi High Court judgment in some detail and to discuss it at some length hereunder. The facts of the Public case were that a firm consisting of five partners was carrying on the business of manufacture and sale of condensed milk and ice cream etc. It converted itself into a private limited company and transferred all the assets and liabilities of the firm to the newly‑formed company at their book value. The fixed assets were transferred at their original cost of Rs.4,20,801 while the written down value of the assets stood at Rs.2,13,

587. The difference between the original cost and the written down value was treated by the Income‑tax Officer as under section 10(2)(vii) of the repealed Income‑tax Act. Income Tax Appellate Tribunal held that since the share allotted by the company to its shareholders were equivalent to the shares of the partners of the old firm there was no sale which could result in any profit. On a reference, the Honourable Karachi High Court upheld the views of the Tribunal. Before the Honourable High Court the Patna High Court case of Kameshwar Singh (1903) 48 I T R 483 was inter alia cited on behalf of Department and the following observations of the Honourable Judges in that case were reproduced in the Karachi High Court judgment:‑‑ "the doctrine that no man can make a profit out of himself is not applicable to transactions between a person and limited company, even though all the shares in the company are owned by that person, because from a legal point of view a company is an entity entirely distinct from its share‑holders." The Department also cited the decision of the Dacca High Court in A.K. Khan Plywood Company 1980 P T D 270 the finding in which was also reproduced in the judgment of the Karachi High Court as under:‑‑ "(i) if a firm sells its assets to another company the vendor is liable to pay income‑tax for the difference between the written down value on the date of sale and the price at which the assets are actually sold, that is, the profits earned by it, even if the partners of the firm are identical; and (ii) there is no exception in the second proviso in clause (vii) of section 10(2) to the effect that if the property remains in the same hands, it will not be a sale within the meaning of this section. If there is a sale in the eye of law and if a profit results therefrom, the making of such profits is liable to taxation." Among the cases cited for the assessee and mentioned by the Honourable Karachi High Court was the Privy Council decision in William Richard Doughty v. Commissioner of Taxes AIR (1927) PC 76 on which considerable reliance was also placed before us by the learned counsel for the assessee in the instant case. The finding of the Privy Council reproduced inter alia in the judgment of the Karachi High Court reads as under:‑‑ "Income‑tax being a tax upon income, the sale of the whole concern which can be shown to be a sale at the profit as compared with the price a given for the business, or at which it stands in the books, does not give. rise to a profit taxable to income‑tax." The Honourable Karachi High Court in Publix industries also quoted from the Indian Supreme Court Judgment delivered by Chagla, C.J and Tendolkar, J. in the case of CIT Bombay City v. Sir Homi Mehta s Executors: "though the assessee and his sons on the one hand and the private limited company formed by them were distinct entities in law, the real result of the formation of the company and the transfer of the shares to that company was only that instead of the shares being jointly held as individuals they were held by these, very persons as a limited company; 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; the assessee did not make any profit or gain in a commercial sense by transferring the shares to the co many; and the Income‑tax authorities were not entitled to levy income‑tax on the difference between the market price and cost price of the shares merely because the market price of the shares at the time of transfer was higher than the cost price." The Honourable Karachi High Court also mentioned the Bombay High Court judgment in Rogers and Co. (1958) 34 I.T.R. 336 in which it was held that at the time of conversion of the assessee firm into a limited company the transfer of assets of the firm to the company was merely a readjustment made by the members and did not involve any profits in the hands of the firm. The Karachi High Court further referred to the Calcutta High Court case of C.I.T. v. Mugneeram Bangur and Company (1963) 47 I.T.R. 565 and quoted the following extracts among others from the judgment:‑‑ "On the facts and circumstances of the case and in view of the finding of the Tribunal that the entire share capital of the company (excepting seven ordinary shares) was taken over by the partners of the firm in lieu of the sale price of the business as a whole, there could no profit in the, transaction by which the entire stock in trade and the business of the firm was transferred to the limited liability company" and "Even if the value of the stock‑in‑trade taken over by the company was greater than the figure shown therefore in the agreement for sale, in the circumstances of the case there was no profit which could be taxed." The case of Mugneeram Bangur was also cited before us by the learned counsel with particular emphasis in support of the assessee's case. Coming back to the Karachi High Court judgment in the Public Ltd. case, the Honourable Court referred to yet another case reported as (1963) 49‑ITR 927 and finally concluded that it was not possible to agree with the judgments cited by the Department in its favour. In this connection the Honourable Court held: "Learned Judges of the Patna High Court in case Maharajadhiraj Sir Kameshwar Singh v. Commissioner of Income‑tax, Bihar and Orissa, referred to above, while coning to a contrary decision did not take into consideration the two Bombay cases (1) Commissioner of Income‑tax. Bombay City v. Sir Homi Mehta and (2) Rogers and Co. v. Commissioner of Income‑tax, Bombay City II. In the circumstances of this case the learned judges held that they were unable to lift the veil of corporate entity and look behind the transaction of sale in order to see who were the real parties to this transaction. The company being a separate entity, and even if the subscribers of the new company were the same persons they could not be so treated. With utmost respect we do not agree with the principle laid down by the learned judges. In the first place because it is a well established commercial principle of law that nobody can sell to himself and make profit out of such a sale. Although it is true that company is entirely a separate body in the eve of law having its own assets and liabilities other than those of the individuals who are the subscribers of the company vet in principle the holders of the shares in the company are the same and their shares are to the same extent to which they were the shareholder in the firm. They cannot themselves be considered to be busters and sellers of their rights muchless they could be dubbed to have made profit out of the so‑called sale. For similar reasons the Honourable Court did not agree with the views in Dacca High Court case of A.K. Khan Plywood Co. referred to earlier. In the Public Industries case the Honourable Karachi High Court thus held that the Tribunal was justified in holding that the transfer of assets by the firm in question was not a sale so as to attract the provisions of section 10(2)(vii) of the Income‑tax Act, 1922. It is obvious from the above and particularly from the portions of the various extracts from superior Court decisions contained in the judgment of the Honourable Karachi High Court that the following points can be considered to go in the assessee's favour" (1) Where the assessee‑vendor and the succeeding company making the purchase have essentially the same composition no profit in the commercial sense can be considered to arise in the hands of the vendor (Sir Hani Mehtas' Executors as followed in the Public case). 2) Even if the assets taken over include stock‑in‑trade and the value of the stock is enhanced in the books of the purchasing company it would under the circumstances above not result in a profit to the vendor. (Mugneeram Bangur and Co. as quoted the Public case). It must, however, be pointed out that the assessee's case is not on all fours with the Public case or the other cases considered in that judgment or on which the learned counsel for the assessee has relied. The first important distinction is that in all the other cases referred to in favour of the assessee it was an artificial person like a firm which had converted itself into a limited company which latter had taken over the business of the firm. In those cases the shareholder of the new company were the same as the partners of the registered firm as in Sir Homi Mehtas' Executors or were essentially the same as in Mugneerram Bangur where the original partners held all but seven shares out of the total 34,993 shares of the new company. Similarly in the case of Morning Star Bus Company (Kerala High Court) which too was separately referred to by the learned counsel "persons carrying on business as an Association of Persons formed themselves into a private limited company". In the Public case itself also a firm of five partners decided to convert itself into a company. The assessee, on the other hand was an individual and although he became a shareholder in the new company together with other members of his immediate family, it cannot be said that the composition of the new company was essentially the same as the composition of the earlier business. In fact, the ownership of the original business of the assessee and of the new business (which had six shareholders) was quite distinct. We do not, therefore, find 4ny merit in the plea that the transfer was in effect to the assessee himself and no profit could arise out of the arrangement. It may be further added here that even the claim that the entire running business of the assessee was taken over by the company is not very relevant in the instant case. In the case of the assessee's sole proprietorship business, the only asset was admittedly the two plots which, as we have already noted. were basically in the nature of the assessee's stock‑in‑trade. The so‑called take over of the assessee's business was thus, in essence, no different from the purchase of the two plots from the assessee by the company. The profit on the sale of the plots (being the assessee's stock‑in‑trade) .was thus taxable in the given situation in the same I manner as of the assessee had, as a dealer in real estate sold the plots to some B other party. We may add here that even in the Doughty case relied upon by the assessee it was observed that "a profit made by the sale of the whole of the stock, if it stood by itself, might well be assessable to income‑tax". This brings us to the assessee's plea that no profit was involved in the transaction because the value of the plots in the books of the assessee company was nothing more than. a book entry and that the assessee did not make any tangible profit which the I.T.O. could assess in his hands. In this connection again the actual position, hc1wever, is: that as per the assessee's own version (and the extract from the Minutes of the, meeting of the shareholders of the company held on 4‑11‑1982, as furnished by the assessee) he had a capital of Rs.4,50,000 in the business whereas shares of the l face value of Rs.8,00,000 were issued to him by the company. This means that the face value of the shares was considerably more than the assessee's capital in his individual business. Similarly, it is also the assessee's own version (as confirmed by the Minutes) that the assessee's income‑tax liability of Rs.18,00,000 was also taken over by the company. This liability was a purely personal liability of the assessee and its assumption by the company was the same as if the company had paid cash to the assessee to discharge his personal tax liability (which liability had nothing to do with the business of the new company). Further more a liability of! Rs.1,00,000 was also statedly incorporated by the company in its accounts (Entry dated 1‑11‑1982) in favour of the assessee which obviously represented a deferred payment to the assessee. The total tangible gains to the assessee out of the arrangement can thus be considered to amount to Rs.22,50,000 which is less than the addition to income made by the I.T.O. at Rs.22,16,

005. Thus the contention of the learned counsel for the assessee that no tangible profit was earned by the assessee as a result of the transaction is also not supported by the facts. It may also be added that the enhanced value of the plots also apparently entered into the computation of its own income by the company since the plots being in the nature of the company's stocks, their cost would be debitable to the company's revenue accounts and any enhancement in the cost would tend to reduce the book profits of the company. To recapitulate the ratio of the various judgments quoted by the learned counsel for the assessee could be considered to favour the assessee if the following cumulative situation had by and large been found to exist in the case:‑‑ (i) If the factual ownership of the new company and of the previous business had been the same or was similar to such an extent as to be practically the same; (ii) if in fact the arrangement involved the take over of an actual running business and not primarily of the take over of the stock‑in‑trade (which in the shape of the plots was the only business asset in the instant case); and (iii) if the enhanced value of the plots in the company's books in fact represented only a book entry, had no revenue implication and did not result in any tangible gain to the seller viz. the assessee. As we have already discussed, however, the above over‑all position was not found to exist in the assessee's case and therefore the Karachi High Court judgment in the Publix Industries case and the other judgments relied upon by the learned counsel for the assessee do not help the assessee's case.

4. Last, but not least, we must point out that in the Lahore High Court judgment in the case of CIT Lahore v. Haji Abdul Majid Khan Zaman & Co., Burewala reported as (1973) 28 Tax 78 the Hon'ble Lahore High Court has held that even in the event of the formation of a private limited company under the same name and comprising the same shareholders as were partners in a registered firm, the transfer of the assets of the registered firm to the company would give rise to income taxable under section 10(2)(vii) of the repealed income‑tax, 1922. In this judgment the Honourable Lahore High Court has not discussed the Karachi High Court judgment in the Public Industries case but has taken into consideration the judgments in the cases of William Richard Doughty, Sir Homi Mehta's Executors and Rogers and Company which were relied upon by the honourable Karachi High Court in the Public Industries case as already discussed. The Hon'ble Lahore High Court while coming to the different conclusion has relied mainly on the judgments in Aron Solomon v. A. Soloman and Co. Ltd. John Foster and Sans Ltd. v. Commissioners of Inland Revenue and J be P coatc v. commissioner of Inland Revenue. The Hon'ble Lahore High Court has also quoted from Salmond's book on jurisprudence and ‑ from Halsbury's Laws of England while reaching its findings that once a company has been incorporated it becomes a person different from its shareholders. Thus in the light of this Lahore High Court judgment the assessee's case would have no legs to stand on at all but as we have already discussed in detail even if the ratio of the Karachi High Court judgment in the Publix Industries case and the ratio of the other cases discussed therein is taken into account, the facts as existing in the assessee's case would not justify the acceptance of the assessee's appeal.

5. In the light of the foregoing we uphold the order of the learned C.I.T. (Appeals) maintaining the addition of Rs.22,16,005 to the assessee's income subject of course to the directions of the learned C.I.T.. (Appeals) concerning the assessee's claim regarding Special National Fund Bonds. The assessee's appeal thus fails and stands rejected. FAKHAR‑UD‑DIN SIDDIQUI (JUDICIAL MEMBER).‑‑‑I agree with the conclusion arrived at by my learned brother that the appellant/assessee's appeal merits dismissal.

2. The appellant purchased Special National Fund Bonds on January 29,1986 and did not disclose this fact to the Income‑tax Officer. The appellant/assessee could purchase Special National Fund Bonds from July 1,1985 to August 31, 1985. It was only before the learned Commissioner of Income‑Tax (Appeals), that the assessee disclosed about the purchase of Special National Fund Bonds. Plea of allowance of set‑off against the Special National Fund Bonds was neither raised before the Income‑tax Officer nor any such claim was made. The assessee was required to put its claim at appropriate time with all the supporting documents in order to get the benefit in accordance with, para. 3(a) of Circular No.9 of 1985.

3. I am also inclined to make illustration of the terms set‑off and counter‑claim. There is a well‑recognized distinction between a set‑off and a counter‑claim. Although, in one sense both are identical inasmuch as they are cross‑actions on the part of the respondent but a set‑off is essentially a weapon of defence. If the respondent succeeds in establishing it, it serves the purpose of answering to the petitioner's claim either wholly or pro tanto because a set‑off is really a debt claimed by the respondent against the petitioner to counter‑balance a debt claimed by the petitioner against the respondent. A counter‑claim, on the other hand, is essentially a weapon of offence and is not really relevant as a plea in defence to the claim of the petitioner. It only enables a respondent to enforce a claim against the petitioner effectively as in an independent action. Its essential nature is that of a cross‑suit pleaded through the means of the written statement/reply in the same proceedings.

4. In the instant appeal the claim of set‑off against Special National Fund Bonds is not available as a right to the assessee on facts as well as in law. With these observations the matter is remitted back to the Income‑tax Officer for examining the assessee's plea in the light of relevant Circulars. In case the assessee's case fulfil ail the conditions or he is qualified for claiming set‑off; only then the Income‑tax Officer will consider the plea on merits. As a result the order of the learned C.I.T.(A) is maintained in toto. M.BA./911/T Case remanded.