1983 PLP (Trib (PTD)

(1) (1963) 7 Taxation 57 (Trib.). (2) (1966) 13 Taxation 185. (3) (1969) 19 Taxation 209.

7. Mr. Y. S. learned Departmental Representative; inn the other hand, supported the impugned orders by contending that the sale of the assets in question had been effected because of the difference in status of the purchaser and the seller. In his submission, the purchaser was Registered‑firm whereas the seller was a private limited company and both of them were separate legal entities. The assessments according to him, are made in the hands of a peon, as defined in the Act and here too there were two different persons ft., a firm and a company. In his submission, therefore, the provisions of section l0(2)(vii) of the Act were rightly invoked and there is no real cause of grievance for the appellant. He maintained, without even making a reference to any of the cases cited by the learned counsel, for the appellant that the concept of transfer of assets by one to one‑self is wholly fallacious. He was unable to cite any authority in support of his contention.

8. We are not impressed by the arguments of the learned D. R. in the price of the authorities cited by the learned counsel for the appellant. It was further pointed out by the appellant's counsel, without being controverted by the D. R., that the depreciation 'had been allowed in the hands of firm on the written done value of the assets thereby affirming the principle enunciated in the above referred authorities that the transfer of assets from the company to the firm is not a sale so as to justify the allowance of depreciation on the book value of the assets. The department could not Justly adopt two different standards or basis for valuing the same assets in the hand of two different entities viz. the transfer and the transferee.

9. We may briefly refer to the facts of the above‑noted reported deci sions as the duct laid down therein are on all fours applicable to facts of the instant case and provide a complete answer to the contentions raised on behalf of the revenue before us. All these authorities manifestly lay down that the transfer of assets from the firm to the company upon the change of legal status from a partnership to a corporation is not a sale and, therefore, no surplus accrues to the appellant‑firm within the meaning of section 10(2)(vii) of the Act. The only difference, it may be noted, in the facts of the reported decisions and that of the case in hand is that in these cases the transfer of assets was made from the firm to the limited company whereas in the instant case the assets have been transferred by the limited company to the firm.

10. The facts of the case reported as (1963) 7 Tax. 57 (Trib.) were these, The partners of tile firm formed themselves into a private limited company. The shares allotted to each of the partners in the company were in the same proportion as the shares held by them in the firm. The assets of the firm having the written down value of Rs. 3,75,967 were transferred to the company at the original cost of Rs. 5,89,

361. The Income‑tax Officer assess ed the difference between the original cost and the written, down value, namely, Rs. 2,13,349 under section 10(2)(vii) of the Act. On appeal, the Tribunal relying upon the cases, reported as (1955) 28 I T R 928 and (1958) 34 I T R 336, held that inclusion of the profit of Rs. 2,13,349 under sec tion 10(2)(vii) was not tenable. We may make a mention of the fact although it was not brought to our notice by the representatives of the parties that on a reference in that case, the Dacca High Court opinion that it was a transac tion of sale within the meaning of second proviso to section 10(2)(vii) of the Act and the resultant profit therefrom was liable to tax See (1966) 13 Tax. 271.

11. The facts of the case C. I. T. v. B. T. Ltd. ((1966) 13 Taxation 182), were that the firm comprising of six partners incorporated itself into a private limited com pany. The shareholders of the new company were the same as the former partners of the defunct firms and they were allotted a share of equal value as shareholders in the new company against their shares in the firm. The tenancy business was set up during "previous year" relevant to the assess ment year 1956‑57 and the firm. was allowed the benefit of additional depre ciation for the assessment year 1956‑

57. After its incorporation, the company claimed additional depreciation for the years 1957‑58 and 1958‑59, also. The Income‑tax Officer allowed 10 % depreciation on machinery but declined to allow additional depreciation on the ground that the machinery was second‑hand and not installed by the assessee‑Company. The assessee's appeal to the Appellate Assistant Commissioner failed. On second appeal, the Appellate Tribunal held that there was no transfer or change in owner ship in the real sense inasmuch as the partners of the firm, who were carrying on their business had formed themselves into a private limited company. The Tribunal, therefore, allowed the additional depreciation for the years 1957‑58 and 1958‑

59. The Lahore High Court affirming the view of the Tribunal, observed as follows :‑ "As already stated, the firm consisted of six partners and the persons who became shareholders of the company were not different. A fins and a company were not different legal entities but they are identical in this cm because the persons who are benefited by profits made by the firm and those made by the company are the same and these profits are shared by the same persons in identically the same propor tion and the mere fact that the firm has converted itself into a private limited company will not disentitle the assessee from claiming the additional depreciation, that has happened in this case is that the assets of the firm now belong to the company, no change has taken place in any respect, except in the legal status of the assessee from a partnership to a corporation. In the case of a taxing statute the Court has to look to the real nature of the transaction and not to its form. In this case, we find that it is only a readjustment made by the partners of the firm to carry on their business as a limited company. The enterprise is the same, the persons are identical, the assets, machinery, building and plant have been absorbed in the share capital of the new company and in this way neither any change of ownership has taken place nor any re‑installation of machinery has been occasioned. In this view of the matter it cannot be said that the machinery is second‑hand and we are of the opinion that the depreciation claimed went with the assets and even if it can be said that the assets were owned by two different legal persons, the allowance has no reference to the persons who owned but is it attached to the machinery and plant itself."

12. The facts of the case C.I.T. T. v. P. I. ((1969) 19 Taxation 209), as appearing in the head notes were these :‑ A firm. consisting of five partners, was carrying on the business of manu facture and sale of condoned milk, ice‑crew, etc. It converted itself into a private limited company and transferred all the assets and liabi lities of the firm to the newly‑formed company at its book value. The fixed assets were transferred at their original cost of Rs. 4,20,801 while the written down value of the assets was estimated at Rs. 2,13,

587. The difference between the original cost and the written down value i.e., a sum of Rs. 2,07,214 was treated by the income‑tax Officer as profits and tax was levied on this profit under the second proviso to sec tion 10(2)(vii) of the Income‑tax Act. Before the Appellate Tribunal the assessee contended that the transfer of the fixer assets was not within the mischief of section 10(20)(vii) of the Act as the shares allotted by the limited company to its shareholders were equivalent to the shares of the partners of the old firm. In these circumstances, it was argued, there was no sale which could result in any profits. The Appellate Tribunal accepting the assessee's contention held that the difference between the original cost and the written down value of the assets was net profits and, as such, it could not be assessed to tax by the Income‑tax Officer." The Karachi Bench of the erstwhile High Court of West Pakistan answered the reference in affirmative. The conclusion arrived at by the learned Judges was that 'The majority view is that if the partners of s firm decide to float a company transferring their assets in the firm to the new company, such a transfer is not a sale. The contrary view would be a clog in chang ing the business of firm to corporate bodies, and they would be ham pered from converting themselves into limited companies and perhaps this may lead to some undesirable devices which the promoters of the new company may have to adopt for that purpose. We need riot repeat the well‑Known principle followed by the majority Courts that no person can himself be a buyer and seller and commercially it is not possible that such a sale, if at all, by any stretch of imagination, could be considered as one would result into any profit, and unless profit is made, such a transfer would not come within the mischief of section 10(2)(vii) of the Income‑tax Act. Legally no doubt, it is true that a company for separate entity from the subscribers of the company but logically and commercially it makes no sense at all that when partners in a firm decide to float a new company with almost the same shares in the new company to the extent of their shares in the firm they would be buyers and sellers of their own interest. The assets and liabilities of the firm are transferred to the company, but as share holders of the company their liabilities though limited but it is limited to the extent of their shares in the old firm. in view of the matter we fall to understand how this Act of persons who being transferor of their sharers in a firm to the new company which allots theca shares to the extent of their interest in the firm can be termed as a "sale", which can result in any profit." [N.B.‑The contrary view expressed by the Dacca High Court in 13 Tax. 271 and to the Patna High Court in (1963) 48 I T R 483, was duly con sidered and dissented to].

13. From the facts mentioned above it is manifest that the view of the Tribunal has all along been that such transfers or change in ownership as is involved in the instant case, is not "sale" in the real sense and that the provisions of section 10(2)(vii) are not attracted to this type of transactions. This view has found favoured with the two High Courts in Pakistan as discussed above. There is thus no justification for us to depart from that view In passing, we may state that the Supreme Court of Pakistan in the case of E.V.Miller (PLD 1959 SC (Pak.) 219) has also held that in taxing statutes on should look at the real nature of the transaction instead of looking at its mere form.

14. For the reasons given hereinabove, we would hold that the provisions of section 10(2)(vii) of the Act were not applicable to the transaction in question and the impugned orders are, consequently reversed hereby.

15. In the result, both the appeals succeed and are allowed as indicated above.