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Miscellaneous Judicial Case No. 57 of 1955, decided on 9th August 1962.

Income

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-‑Formation of limited company to carry on assessee's business‑All shares in company held by assessee‑Difference between cost price and sale price‑Whether assessable as profits‑Doctrine that no one can make profit out of himself- Applicability‑Company, whether separate entity ‑ Duty to look to economic realities‑Income‑tax Act, 1922, S. 10(2)(vii), second proviso‑Commissioner of Income‑tax v. Sir Homi Menta's Executors (1955) 28 I T R 928 dissented from].

The doctrine that no man can make a profit out of himself is not applicable to transactions between a person and a 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 shareholders.

The assessee who was carrying oil the publication of some newspapers floated a private limited company for the purpose of carrying on this business and sold to the company the said busi ness as a going concern for the sum of Rs. 12,50,000 which wets received by the assessee in the shape of 12,500 fully paid up shares of Rs. 100 each in the company. Out of the 25,000 shares in the company all but 50 shares were held by the assessee and the remaining 50 were held by his nominees. The original cost of the building, plant and machinery which were trans ferred was Rs. 2,79,822 and their written down value at the time of transfer was Rs. 1,49,037. The income‑tax authorities treated the excess, viz., Rs. 1,30,785, as profits under the second proviso to section 10(2)(vii) of the Income‑tax Act and assessed this amount to income‑tax. It was contended oil behalf of the assessee that for tax purposes it was the duty of the authorities and Courts to "lift the veil of cor porate entity" and pay regard to the economic realities behind the transaction and, since, in substance, all the shares in the company were owned by the assessee, there was really no sale to different party but only a different method of carrying on the same business and that the excess of Rs. 1,30,785 could not be assessed lender the second proviso to sec tion 10(2)(vii) :

Held, that a person veiled by the mask of corporate personality cannot be allowed to pierce the veil himself for his own benefit. The assessee, though he was the owner of all the shares in the company, cannot claim to be treated as if he were identical with the company in order to promote his own benefit or advantage. The assessee and the company were distinct legal entities and the sum in question was rightly assessed to income‑tax.

Doughty v. Commissioner of Taxes (1927) A C 327 ; Sir Kika bhai Premchand v. Commissioner of Income‑tax (1953) 24 I T R 506 (S C) distinguished.

Commissioner of Income‑tax v. Sir Homi Mehta's Executors (1955) 28 I T R 928 dissented from.

Held further, that the fact that the consideration was received in the shape of shares and not in cash did not make any difference.

[Case‑law ref.].

In compliance with the directions of the High Court of Judicature in Order No. 15 dated July 14, 1959, in M. J. C. No. 57 of 1955, we hereby draw up a statement of case and refer the question of law set out therein, namely :

"Whether under the facts and circumstances of the case the amount of Rs. 1,30,785 (Rupees one lakh thirty thousand seven hundred and eighty‑five) only being the excess of sale proceeds of the building, plant and machinery over the written down value thereof could in law be termed to be income, profits and gains of the petitioner "

2. Originally, the assessee, Maharajadhiraja Dr. Sir Kameshwar Prasad Singh, had filed an application under section 66(1) on June 23, 1954, requiring certain questions of law to be referred to the High Court. The Tribunal came to the conclusion that no question of law arose and refused to refer a case to the High Court. Subsequently, the Tribunal was directed by the High Court under section, 66(2) to draw up a statement of case and refer to the High Court certain questions of law framed by the High Court. In compliance with that requisition, a case was stated in M. J. C. No. 57 of 1955. The High Court, however, did not direct that the question of law set out in paragraph 1 should be referred. Thereafter, the assessee moved the Supreme Court and obtained a direction that the question of law aforesaid should be referred to the High Court for its opinion.

3. The statement of case refers to the assessment year 1950‑51, the previous year being 1356 (F). The assessee was, inter alia, carrying on, as sole proprietor, the business of publishing two newspapers, namely, Indian Nation and Aryavarta. The assets of the newspaper business included, among other things, some building and certain plant and machinery.

4. The assessee floated a private limited company in the year 1948, styled "The Newspaper and Publication Ltd." (hereinafter referred to as the "company"). Its authorised capital was Rs. 25 lakhs made up of 25,000 shares of Rs. 100 each. The very first object stated in the memorandum is as follows :

"The objects for which the company is established are all or any of the following :

As a first operation to acquire, purchase, take over or agree to take over by private treaty or in any other lawful manner whosoever as a going concern the undertakings now being carried on under the names and styles of the Indian Nation and the Aryavarta newspapers and the Indian Nation press along with all or any of the stock‑in‑trade, rights, assets interest, liabilities and obligations of the said undertakings with all their advantages, goodwill, licences and privileges as standing on . . . and pay for such rights and privileges in cash or in shares or partly in cash and partly in shares of the company as may be agreed upon between the parties), and to carry on the said business along with other business mentioned in the other succeeding sub‑clauses of this clause of the memorandum of association.

5. In fulfilment of the above object, the company took over, with effect from September 30, 1948, the business of publication of Indiana Nation and Aryavarta as a going concern along with its assets and liabilities. The consideration for the transfer was Rs. 12,50,000 to be satisfied by the allotment to the Maharajadhiraja of fully paid‑up shares of the requisite amount. Though a formal deed of sale was not immediately drawn up the agreement was followed by actual delivery of possession to the company of movable and immovable assets. To place the transaction on a proper basis a registered sale deed was executed on June 1, 1950, and registered on August 12, 1950, on stamp paper of Rs. 8,435‑10‑0 confirming the transaction already effected on September 30, 1948. A copy of the sale deed is marked as Annexure "A" and forms part of the case. For the purpose of the case both the sides agree that the transaction took place on September 30, 1948, which falls in the previous year for the assessment year 1950‑51.

6. In consideration of the transfer made on September 30, 1948, of the business with its assets and liabilities, the company, by resolution dated November 6, 1948, allotted 12,500 fully paid up shares of Rs. 100 each to the assessee. The assessee also subscribed in cash for and was allotted a further 12,500 shares of Rs. 100 each. However, at the instance of the assessee 24,950 shares were allotted in the name of the assessee himself and the balance of 50'shares in the names of his nominees as follows :

Raja Bahadur Vishweshara Singh 10 shares

Pt. Girindra Mohan Misra 10

Kumar Ganganand Singh 10

G. P. Vaidyanath Jha 10

G. P. Danby 10

The sale deed dated June 1, 1950, recites that the value of the movables was determined after due and proper assessment to Rs. 8,41,000, that they were made over to the company and that the consideration thereof was satisfied by the allotment of 8,410 fully paid‑up shares of the company. The machinery and plant of the business were included amongst the movables. As regards the immovable properties, the sale deed dated June 1, 1950, recited that they were delivered possession of to the company and were valued at Rs. 4,09,000 which was met by the allotment of 4,090 shares.

According to the assessment records of the assessee, the original cost of the building (including cost of subsequent additions) came to Rs. 49,270 while the original cost of machinery and plant (including subsequent additions) came to Rs. 2,30,552 making the aggregate original cost of Rs. 2,79,822. The written down value of the building as on September 30, 1948 (as per assessment records), was Rs. 29,669, and the written down value of plant and machinery as on the same date, was Rs. 1,19,368 thus accounting for the total written down value of Rs. 1,49,037 in respect of building as well as plant and machinery. Since the value, according to the sale deed, for movable and immovable properties were in excess of the original cost of the depreciable assets, the Income‑tax Officer held that there was a sale and a realisation therefrom in excess of the original cost to the assessee. The Income‑tax Officer also noted that the assessee himself in his accounts took credit for a net profit of Rs. 2,50,000 and credited the sum to his capital account. Since the amount of Rs. 1,30,785 (representing the difference between the original cost and written down value) had been allowed by way of depreciation on building, plant and machinery, the Income‑tax Officer subjected the sum to tax as a revenue profit under the second proviso to section 10(2)(vii).

9. In the appeal before the Appellate Assistant Commissioner it was contended that since the Maharajadhiraja owned all the shares of the limited company, there was no material difference between vendor and vendee and that there was no profit. The Appellate Assistant Commissioner, however, considered that, since the company was a separate legal entity, it could not be identified with the assessee in his individual capacity. He further held that the sale deed executed subsequently in June 1950, in confirmation of the transaction was nothing but a sale for which the consideration had already passed (paragraphs 59 to 61 of the Appellate Assistant Commissioner's order).

Before the Tribunal it was contended that the transaction of transfer of the assts to the private company was not a sale proper and that there was no receipt of the amount of the sale. The Tribunal held that the company was a separate judicial person and negatived the assessee's claim that there had been no sale. The relevant extract from the Tribunal's order is annexed hereto as Annexure "B" (paragraph 23) and forms part of the case.

In this connection, mention has to be made of how the transaction of sale was dealt with in the assessment of the company. There it was claimed that for purposes of allowing depreciation to it, the original cost to it of building, plant and machinery should be taken to be the values actually paid by it and as recited in the sale deed. This contention was accepted by the Income‑tax Officer. Accordingly, he allowed depreciation to the company on the original cost to it of Rs. 85,000 in respect of the building and Rs, 2,74,000 in respect of machinery (apart from certain other items). It will be noticed that the values are higher even than the original cost of these assets determined in the hands of the assessee. Copy of the assessment orders of the company for the assessment years 1950‑51 and 1951‑52 is annexed hereto as Annexure "C".

The parties have been heard on the draft statement. Both parties agree that the facts, as set out above, have been correctly stated. The statement of case is accordingly finalised.

S. K. Mazumdar, S. K. Srivastava and Vedanand Jha for the Assessee.

R. J. Bahadur for the Commissioner.

JUDGMENT

RAMASWAMI, C. J.

‑In this case the assessee, Maharajadhiraj of Darbhanga, floated a private limited company called "The Newspapers and Publications Limited" (hereinafter referred to as the "company") having an authorised capital of Rs. 25,00,000 made up of 25,000 shares of Rs. 100 each. The first paragraph of the memorandum of association of the company states as follows :

"As a first operation to acquire, purchase, take over or agree to take over by private treaty or in any other lawful manner whosoever as a going concern the undertakings now being carried on under the names and styles of the Indian Nation and the Aryavarta newspapers and the Indian Nation press along with all or any of the stock‑in‑trade, rights, assets, interests, liabilities and obligations of the said undertakings with all their advantages, goodwill, licences and privileges as standing on . . . and pay for such rights and privileges in cash, or in shares or partly in cash and partly in shares of the company (as may be agreed upon between the parties), and to carry on the said business along with other business mentioned in the other succeeding sub‑clauses of this clause of the memorandum of association."

In pursuance of the above object the company took over with effect from the 30th September 1938, the business of publica tion of the two newspapers, Indian Nation and Aryavarta as a going concern along with its assets and liabilities. The considera tion for the transfer was Rs. 12,50,000 to be satisfied by the allotment to the Maharajadhiraj of fully paid‑up shares of the requisite amount. Though a formal deed of sale was not immediately drawn up, the agreement was followed by the actual delivery of possession to the company of the movable and immovable assets. To place the transaction on a proper basis, a sale deed was executed on the 1st June 1950, and registered on the 12th August 1950, on stamp paper of Rs. 8,435‑10‑0 confirm ing the transaction which had already peen effected on the 30^th September 1948. In consideration of the sale made on the 30th September 1948, of the business, with its assets and liabilities, the company passed a resolution on the 6th November 1948, allotting 12,500 fully paid‑up shares of Rs. 100 each to the assessee. The assessee also paid in cash for a further allotment of 12,500 shares of Rs. 103 each. As desired by the assessee, however, 24,950 shares were allotted in the name of the, assessee himself and the balance of 50 shares were allotted in, the names of his nominees as follows :‑(1) Raja Bahadur Vishwashara Singh, 10 shares, (2) Pundit Girindra Mohan Misra, 10 shares, (3) Kumar Ganganand Singh, 10 shares, (4) Pundit Vaidyanath Jha, 10 shares, (5) Mr. G. P. Danby, 10 shares. The sale deed dated the 1st June 1950, recites that the value of the movables was determined after due and proper assessment to be Rs.8,41,000 and the consideration thereof was satisfied by the allotment of 8,410 fully paid‑up shares of the company. The machinery and plant of the business were included amongst the movables. As regards the immovable properties, the sale deed recites that they were valued at Rs.4,09,000 which was satisfied by the allotment of 4,090 shares. According to the records of the assessee, the original cost of the building was Rs. 49,270 and the original cost of the machinery and plant was Rs. 2,30,552. The written down value of the building on the 30th September 1948, was Rs. 29,669 and the written down value of the plant and machinery on the same date was Rs. 1,19,368. Since the value, according to the sale deed, of the movable and immovable properties was in excess of the written down value, the Income tax Officer held that the assessee was liable to be taxed on the difference between the two amounts, namely, the sum of Rs. 1,30,785, under the second proviso to section 10(2)(vii) of the Indian Income‑tax Act. The Income‑tax Officer also noticed that the assessee himself in his account books took credit for a net profit of Rs. 2,50,000 out of the transaction and credited the amount to his capital account. The assessee took the matter in appeal and contended that, since he practically owned all the shares of the limited company, there was no material difference between the vendor and the vendee and the transaction was not in reality a sale. The Appellate Assistant Commissioner rejected the contention, holding that, since the company was a separate legal entity, it could not be identified with the assessee in his individual capacity. The assessee made a further appeal to the Income‑tax Appellate Tribunal, but the appeal was dis missed.

Under section 66(2) of the Indian Income‑tax Act the Income‑tax Appellate Tribunal has stated a case on the following question of law :

"Whether under the facts and circumstances of the case the amount of Rs. 1,30,785 (Rupees one lakh thirty thousand seven hundred and eighty‑five) only being the excess of sale proceeds, of the, building, plant and machinery over the written down value thereof could in law be termed to be income, profits and gains of the petitioner "

The argument presented on behalf of the assessee is that the transaction of the 30th September 1948, was not sale by the appellant to the newly floated private limited company. It was submitted that in substance the assessee owned practically all the shares of the company and it was open to the High Court to lift the veil of corporate entity and look behind the same in order to see who were the real parties to the transaction. It was submitted that the company was not distinct and separate from the assessee himself that the present case comes within the doctrine that no man can make a profit out of himself. I see no warrant for accepting the submission made on behalf of the assessee. From the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and of being subjected to duties which are not the same as those enjoyed or borne by its members. An illustration of the principle is the decision of the Court of Appeal in John Foster & Sons Limited v. Commissioners of Inland Revenue ((1894) 1 Q B 516). In that case there was a deed between eight partners composing a firm of the first eight parts, and a limited company of the ninth part, and there was a recital in the deed 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 that there should be allotted, amongst the partners, in proportion to their shares in the partnership, the whole of the shares in the company. The deed then recited that such a company had been registered, and that all its shares were taken and held by the partners in specified proportions ; and it was thereby witnessed that, "in pursuance of the said arrangement, and for the purpose of giving effect to the said scheme, and of vesting the real estate of the partnership in the company", the eight partners conveyed and assigned to the company all the real estate and trade‑marks of the partnership. It was held by the Court of Appeal in these circumstances that the deed was a transfer of property from individuals to a corporation in con sideration of "stocks or securities" within the meaning of section 71 of the Stamp Act, 1870, and that accordingly it was a "conveyance on sale" chargeable with an ad valorem duty within the Schedule to the Act ; and it was none the less so because the eight partners who conveyed the property were also the individuals who constituted the corporation. At page 527 of the report, Lindley, L. J. states :

"Now, the document in this case is an indenture made between eight gentlemen of the first eight parts, and John Foster & Sons, Limited (hereinafter called the com pany') of the 9th part'. Pausing there for a moment : although the persons of the first eight parts may be, and were members, and the only members, of John Foster & Company, Limited, John Foster & Company, Limited, is not those eight individuals; John Foster & Company, Limited, is a corporation. We have accordingly two parties, one party consisting of several indivi duals, 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."

At page 529 of the report Kay, L. J. observed as follows:

"Now, that there was a conveyance is beyond all question. The persons, who are named as vendors in the deed have divested themselves of their property in the subject of that conveyance, and all that property is vested in an entirely independent and separate body‑namely, a corporation. Suppose that corpora tion had consisted of altogether different persons, no one for a moment would doubt that this was a conveyance on sale. Suppose there had been one person in it different, there is nothing that I have heard in the argument which induces me to suppose that even in that case it could have been doubted that this was a conveyance on sale. But the argument, as I understand it, is this that the individual corporators who composed that corpora tion were, in fact, the very identical persons who were conveying this property to the corporation, and the corporation had no other property except this which it took under its conveyance ; and that, as the only value of the shares and debentures was derived from this very property which the individual corpora tors were conveying to the corporation, the conveying partners either got no consideration for that which they conveyed other than part of the property actually conveyed, or they got no consideration at all. Now, I do not follow that argument in the least. I think it is a fallacy from beginning to end. In the first place, a corporation is a different thing from the individuals who compose it ; and, secondly, the shares and debentures of a corporation are not the same thing as the property which that corporation owns."

A. L. Smith, L. J., the third member of the Court of Appeal, also expressed a similar view. The same principle underlies the decision of the Court of Appeal in Ryhope Coal Company Limited v. Foyer ((1881) 7 Q B D 485). The leading case on this topic is Salomon v. Salomon & Co. ((1897) A C 22), in which the House of Lords refused to identify a company with its controlling share‑holders so that the latter could claim the preferential rights of a bond‑holder against the company to the detriment of its genuine creditors. "it has become the fashion", said Lord Macnaghten to call companies of this class one‑man companies'. That is a taking nickname, but it does not help one much in the way of argument. If it is intended to convey the meaning that a company which is under the absolute control of one person is not a company legally incorporated, although the requirements of the Act of 1862 may nave been complied with, it is inaccurate and misleading; if it merely means that there is a pre‑dominant partner possessing an overwhelming influence and entitled practically to the whole of The profits, there is nothing in that contrary to the true intention of the Act of 1862 or against public policy or detri mental to the interests of creditors. If the shares are fully paid up, it cannot matter whether they are in the hands of one or many. If the shares are not fully paid, it is as easy to gauge the solvency of an individual as to estimate the financial ability of a crowd."

Lord Halsbury stated as follows : "Either the limited com pany was a legal entity or it was not. If it was, the business belonged to it and to Mr. Salomon. If it was not, there was no person and no thing to be an agent at all. It is impossible to say at the same time that there is a company and there is not."

The principle of Salomon's case has been reaffirmed by the House of Lords in Commissioners of Inland Revenue v. John Sansom ((1921) 8 Tax Cas. 20). In that case all the shares of a limited company save one were owned by one man, Mr. Sansom, who had turned his timber business into a company. The company never distributed any dividends, but it made loans to Mr. Sansom at different times, without security and without interest. The company went into voluntary liquidation. The loans were not repaid, but were taken into account when Mr. Sansom received his share of the assets in the liquidation. It was sought to charge Mr. Sansom with super‑tax on the loans. The Special Commissioners of Income‑tax, however, discharged the assessment on the ground that the company was a properly constituted legal entity, that it had power to make loans to such persons, aid on such terms, as it should think fit, and that it did make such loans to Mr. Sansom. On appeal to the King's Bench Division, Rowlatt, J. ordered the case to be remitted to the Special Commissioners on the ground that they had not found as a fact that the business had been carried on by the company or that it had really been carried on by the assessee to the exclusion of the company. The assessee appealed against Rowlatt, J.'s order remitting the case to the Special Commissioners. The Court of Appeal set aside the order of Rowlatt, J. on the ground that the existing findings of the Commissioners involved the view that the business was the property of the company and, therefore, negative the possibility that the company was carrying on, as agent for Mr. Sansom, a business which belonged to Mr. Sansom. The same view has been expressed by the Judicial Committee in a later case, E. B. M. Co. Ltd. v. Dominion Bank ((1937) 3 A E R 555). In that case a Bank accepted a document as an additional security for an advance to three partners, who, in addition to and apart from the partnership were directors of a limited company. The document in question charged the company's interest in certain bonds which had been deposited with the Bank to meet any judgment which might be obtained against the company in the then impending litigation. The document was signed by the three partners and the com pany's seal was affixed thereto, accompanied by the signature of one of the partners as president and of another as secretary of the company. No resolution was ever passed, either by the company or by the directors, authorising the creation of the charge. The partners held all the shares in the company except two which were held by two other directors of the company. The litigation against the company was concluded substantially in the company's favour and the Bank claimed the balance of the proceeds of sale of the bonds in reduction of the partners' indebtedness. It was held in these circumstances by the Judicial Committee that as the company, acting through its directors, and not by its shareholders in general meeting had purported to apply its property for the benefit of those directors, the transaction was unenforceable, and the Court would not inquire whether the company had derived any benefit from it. The Bank was, therefore, bound to account to the company for the balance of the proceeds of sale of, the bonds. At page 564 of the report Lord: Russell of Killowen states as follows :

"Their Lordships are unable to support the decision in favour' of the Bank upon the grounds suggested by Riddell, J. AR They believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained, between an incorporated company's legal entity and its actions, assets rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand. Masten, J. A. (whose judgment was concurred in by Latchford, C. J. A. and Fisher, J. A ) was of opinion that the company was not a sham or cloak for the three partners, and did not act as agent for them. He drew attention (and rightly as their Lordships think) to the grave risk of introduc ing confusion into the settled principles of company law.‑

It is also well established that a person veiled by the mask of corporate personality cannot be allowed to pierce the veil himself for his own benefit. In other words, the owner of all the shares in a limited company cannot claim to be treated as if he were identical with the limited company in order to promote his own benefit or advantage. This view is supported by a decision of the House of Lords in Macaura v. Northern Assurance Company Limited ((1925) A C 619), in which a corporator holding all the shares of a limited company insured against fire the timber belonging not to him but to the company. The corporator insured the timber in his own name and not in the name of the company. It was held by the House of Lords that he had no insurable interest in the timber.

It is true that in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade or legal mask. The first excep tion is where there is fraud or improper conduct. For example, the Courts will not allow company promoters to conceal the profits which they are making by operating through dummy com panies In re: Derby ((1911) 1 K B 95) and will insist that disclosure of profits must be made not to a board of dummies but to the members, actual and intended. Perhaps the best illustration of this class of cases is afforded by Gilford Motor Company v. Horne ((1933) 1 Ch, 935). In that case, Horne, a former employee of the plaintiffs, had covenanted not to solicit its customers. He formed a company to carry on his business and it undertook the solicitation. An injunction was granted against both him and the company to restrain them. The company was described in the judgment of the Court of Appeal as "a mere cloak or sham". On the basis of rather similar principles the Court will pay regard to the substance rather than to the form in deciding whether an agreement is void as conflicting with public policy. A good illustration is afforded by the decisions on restraint of trade. The leading case of Nordenfelt v. Maxim‑Nordenfelt ((1894) A C 535) establishes that a covenant in restraint of trade is normally valid when entered into by the seller of goodwill (as opposed to an employee), and that for this purpose a covenant by a shareholder and managing director on a sale by the company is treated as a covenant by a seller and not subjected to the stricter rules applying to an employee. In Connors Bros. Ltd. v. Connors ((1940) 4 A E R 179 (P C)) the Judicial Committee extended this rule to the case of a covenant entered into by the managing director on the sale by him and others of a controlling interest in the share capital of the company. Again the Courts will look behind the facade of the company and its place of registration in order to determine its residence. For this purpose the test laid down has long been the place of its "central management and control". Normally this place will be that where the board of directors, function, but it might, no doubt, be the place of business of the managing director (especially if he held a controlling interest) or that of a parent company. The question of residence is impor tant mainly in connection with taxation Union Corporation Ltd. v. Inland Revenue Commissioners ((1952) 1 A E R 646) but it may also govern enemy status Daimler Company v. Continental Tyer and Rubber Company ((1916) 2 A C 307) or subjection to the jurisdiction of English or foreign Courts.

Apart from these exceptions the strict formalism of Salomon's case still prevails, and 1 think the principle laid down in that case must govern the decision of the present case which is not covered by any of the well known exceptions to the application of that rule. In my opinion it is not possible, in the circumstances of this case, to ignore or disregard the mask of corporate entity or to analyse the economic realities behind the transaction of sale. In my opinion the Income‑tax Tribunal has correctly taken the view that the limited company is a separate juridical person and so there was a transaction of sale between the assessee and the limited company and the assessee is liable to be taxed for the excess of sale proceeds over the written down value under the second proviso to section 10(2)(vii) of the Indian Income‑tax Act.

On behalf of the assessee reference was made by learned counsel to the decision of the Supreme Court in Sir Kikabhai Premchand v. Commissioner of Income‑tax ((1953) 24 I T R 506) in support of his argument. In that case the assessee was a dealer in silver and shares and he was the sole owner of the business. The assessee maintained his accounts according to the mercantile system and valued his stock at cost price both at the beginning and at the end of a year. During the relevant year of account the assessee withdrew some silver bars and shares from the business and settl ed them on certain trusts in which he was the managing trustee. In his books of account the assessee credited the business with the cost price of the bars and shares so withdrawn. The, income tax authorities held that the assessee derived income from the stock‑in‑trade thus transferred and assessed him on a certain sum being the difference between the cost price of the silver bars and shares and their market value at the date of their withdrawal from the business. The Appellate Tribunal and the High Court upheld the action of the income‑tax authorities, but the Supreme Court held that no income arose to the assessee as a result of the transfer of shares and silver bars to the trustees in my opinion, the principle laid down in this case has no application to the present case. In the Supreme Court case the crucial facts were that there was no sale by the assessee to the trustees and moreover the Income‑tax Department accepted as correct the entry in the books of account of the assessee and also accepted the system of accounts adopted by the assessee. It is manifest that the material facts of the present case are different and the principle laid down by the Supreme Court is of no avail to the assessee in the present case. On behalf of the assessee reference was also made to the decision of the Privy Council in Doughty v. Commissioner of Taxes ((1927) A C 327). In that case two partners carrying on business in New Zealand as general merchants and drapers sold the partnership business to a limited company in which they became the only shareholders. The sale was of the entire assets, including goodwill, the consideration being fully paid shares, and an agreement by the company to discharge all the liabilities. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its last balance-sheet, a new balance‑sheet was prepared showing a larger value for the stock‑in‑trade. The Commissioner of Taxes treated the increase in value so shown as a profit on the sale of the stock‑in -trade, and assessed the appellant upon it for income‑tax under the Land and Income‑tax Act, 1916, of New Zealand. In these circum stances it was held by the Judicial Committee that the assessment was wrongly made because if the transaction was to be treated as a sale there was no separate sale of the stock and no valuation of it as an item forming part of the aggregate sold. It was conceded by Lord Phillimore, who delivered the opinion of the Judicial Committee, that if the business be purely one of buying and selling, 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 upon the facts Lord Phillimore held the view that it was a "slump transac tion" and no sum could be pitched upon as the actual price of the stock. It is manifest that in the present case there is no question of any "slump transaction" and the principle laid down by the Judicial Committee has no application. Lastly, learned counsel for the assessee relied strongly upon the decision of the Bombay High Court in Commissioner of Income‑fax v. Sir Homi Mehta's Executors ((1955) 28 I T R 928). In that case the assessee and his sons formed a private limited company and transferred to that company shares in several joint stock companies which the assessee had held jointly with his sons, for Rs. 40,97,000, which was the market value of the shares at that time. It was found that these shares had cost to the assessee only Rs. 30,45,027 and the income‑tax authorities levied income‑tax on the difference between the market price and the cost price of the shares on the ground that the assessee had made a profit to that extent by this transaction. It was held by Chagla, C. J. and Tendolkar, J. in these circumstances that though the assessee and his sons on the one hand and the private limited company formed by them were distinct entities, there was in reality no sale, because Sir Homi Mehta and his sons as individuals were selling the shares to themselves constituted as a different legal entity, and so the principle that a vendor cannot make profit out of himself must be applied to the case: It is true that this decision supports the argument of the assessee, but with the greatest respect to the learned Judges of the Bombay High Court I think that this case has not been correctly decided and I express my dissent from that decision for the reasons I have already given.

I shall then proceed to consider the argument addressed on behalf of the assessee that in any event there was no cash receipt and the assessee merely received fully paid‑up shares of the company in consideration of the sale.

It was submitted on behalf of the assessee that the second proviso to section 10 (2) (vii) of the Indian Income‑tax Act does not apply to a case in which the sale proceeds were given in the shape of paid‑up shares and not in terms of cash. I am unable to accept this argument as correct. Profits in the legal sense are received in the shape of money or money's worth. It is well established by numerous autho rities that income received in kind as well as in cash and receipt of anything equivalent of cash is receipt of income. In Californian Copper Syndicate v. Harris ((1904) 5 Tax Cas. 159) a company which was formed for acquiring and re‑selling properties sold certain property for fully paid shares in another company and it was held that the difference between the purchase price of such property and the value of the shares for which the property was exchanged was a profit assessable to income‑tax. It was contended on behalf of the company that there was no realised profit, since the shares had not been sold. Lord Trayner dealt with the contention as follows :

"A profit is realised when the seller gets the price he has bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profit, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so."

The same principal has been enunciated by the House of Lords in Westminster Bank Ltd. v. Osler ((1933) 1 I T R 65), where the bank surrendered certain holdings of national war bonds in exchange for other Government securities and Crown claimed tax on the excess value of the substituted over the original securities. The question was whether these transactions were the equivalent of a realisation of the original holdings and it was held by the House of Lords that they were such an equivalent. "The exchange effected in the present case", said Lord Buckmaster in the course of his judgment, "was in fact the exact equivalent what would have taken place had instructions been given to sell the original stock and invest the proceeds in the new security". The Bank, therefore, in effect realised its profit for it had received it in money's worth of a definitely ascertained amount. The principle has been reiterated by the House of Lords in a aecent case, Gold Coast Selection Trust Ltd. v. Humphrey ((1948) A C 459). In that case a trust company acquired concessions for land considered likely to bear gold, and on July 28, 1934, agreed to sell it to the company in consideration of "the sum of 8,00,000 which shall be paid and satisfied by the allotment and issue to the vendor of 3,200,000 shares of 5 shillings each credited as fully paid‑up".

On November 30, 1934, the shares were duly allotted. The books of the trust company showed the cost to themselves of the concessions to have been 107,875. The question arose what figure, if any, ought to be included in the profits and gains of the trust for the year ending April 5, 1935. It was held by the House of Lords that although inability to realise in a commercial sense an asset such as a block of shares in the year of receipt might be a reason for reducing its valuation, it was not correct to say that for that reason it could not be valued in money for income‑tax purposes in that year. In the course of his speech Viscount Simon observed as follows :

"In my view, the principle to be applied is the following : In cases such as this, when a trader in the course of his trade receives a new and valuable asset, not being money, as the result of sale or exchange, that asset, for the purpose of computing the annual profits or gains arising or accruing to him from his trade, should be valued as at the end of the accounting period in which it was received, even though it is neither realised nor realizable till later. The fact that it cannot be realised at once may reduce its present value, but that is no reason for treating it, for the purposes of income tax, as though it had no value until it could be realised. If the asset takes the form of fully paid shares, the valuation will take into account not only the terms of the agreement, but a number of other factors, such as prospective yield, marketability, the general outlook for the type of business of the company which has allotted the shares, the result of a contemporary prospectus offering similar shares for subscription, the capital position of the company, and so forth. There may also be an element of value in the fact that the holding of the shares gives control of the company. If the asset is difficult to value but is nonetheless of a money value, the best valuation possible must be made. Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible."

Lastly, it was submitted on behalf of the assessee that the accounting year in this case was the period from the 1st October 1948, to the 30th September 1949, and since the sale took place on the 30th September 1948, the assessee could not be taxed under the provisions of section 10(2) (vii) of the Indian Income‑tax Act. I do not think there is any substance in this argument. Before the income‑tax authorities it was never the case of the assessee that the relevant account year in this case was not the Fasli Year 1356 but the period from 1st October 1946, to the 30th September 1949. No such argument was also put forward on behalf of the assessee when the case went to the Supreme Court. I find that the Income‑tax Appellate Tribunal has observed in the statement of the case that the accounting year of this transaction is the Fasli year 1356, namely, the period from 19th September 1948 to the 7th September 1949, and it is not open to the assessee in this reference to go behind this statement of fact made by the Income‑tax Appellate Tribunal. I also notice that in his application under section 66(2) of the Indian Income tax Act the assessee admitted that the sale took place in the relevant accounting year, namely, 1356 Fasli. In my opinion there is no substance in the contention put forward on behalf of the assessee on this point.

For these reasons I hold that in the circumstances of this case the amount of Rs. 1,30,785, being the excess of sale proceeds of the building, plant and machinery, over the written down value thereof, was rightly taxed as income in the hands of the assessee under section 10(2) (vii) of the Indian Income tax Act. I would accordingly answer the question referred by the Income‑tax Appellate Tribunal against the assessee. The assessee must pay the costs of this reference. Hearing fee Rs. 250.

UNTWALIA, J.‑I entirely agree.

Order accordingly.

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