Kapur, J. - (1.)This is an appeal against the judgment and order of the High Court of Bombay in a reference wider S, 8 (5) of the Taxation on Income (Investigation Commission) Act (Act XXX of 1947), hereinafter termed the 'Act'. The assessee company was the applicant before High Court and is the appellant before us and the Commissioner of income-tax Bombay City, was the respondent in the High Court and is the respondent here also. Being a reference under S. 8 (5) of the Act, it was heard and decided by three judges of the High Court.
(2.)The assessee company is a private limited company which was incorporated on May 6, 1943, with a paid up capital of Rs. 20 lacs. It was promoted by two group of persons who for sake of convenience may be called the 'Morarka Group' and the 'Bubna Group'. The Apollo Mills Co., Ltd. of Bombay with a capital of Rs. 50 lacs divided into 25 lacs shares of Rs. 2 each, had as its Managing Agents M/s. E. D. Sassoon and Co. Ltd., who for the sake of brevity will be referred to in this judgment as 'the Sassoons'. They held 19,76,000 shares out of the 25 lacs. The promoters of the assessee company entered into an agreement with the sasoons on April 27, 1943, by which the Sassoons agreed to transfer their Managing Agency in the Mill Co. for Rs. 12 1/2 lacs to the promoters of the assessee company and the whole of their holding of 19,76,000 shares. at Rs.4/4/0 per share, i.e., for Rs. 83,98,000. These shares were to be transferred to the promoters or to the company which they were proposing to float. By clause (3) of this agreement the sale of the Managing Agency and the transfer of the shares was to be simultaneously completed and neither party could require the, completion of the one without the other. On November 1, 1943, a tripartite agreement was entered into between the Sassoons as Assignors, the promoters of the completion of the one without the other On November 1,1943, tripartite agreement was entered into between the Sassoons as Assignors, the promoters of the company as Confirming Parties and the assessee company as Assignees. By that agreement the Managing Agency rights were formally transferred to the assessee company so also the Share Certificates for the whole of holding of the Sassoons in the Mill co, and the necessary blank transfer deeds were delivered.
(3.)Before the agreement of April 27, 1943, and during the course of negotiations with the sassoons the promoters of the assessee company entered into an arrangement with some share brokers for the sale of a large portion of the total holding of 19,76,000 shares of the MilI Co. The price of there shares varied from Rs. 5/8/- to Rupees 5/13/- In all 10,00,000 shares out of the total holding of the Mill co. were sold to these brokers, and they in turn sold these block of shares in smaller lots to a number of purchasers Some shares were sold later; 1,20,000 shares were transferred to 13 nominees of the Morarka Group at cost price. As a result of sale of all these 13,74,000 shares the assessee company received a sum of Rs.16,52,600 excess over the purchase price. The remaining shares the assessee company retained, the assessee company submitted that the profits of the entire holding of the shares had not been Worked out and had therefore not been transferred to the profit and loss account.