COMMISSIONER OF INCOME TAX Vs. GAEKWAR FOAM AND RUBBER CO LTD

JUDGEMENT

(1.) A short but interesting question of construction of S. 15c of the Income-tax Act arises for our determination on this reference, which comes before us at the instance of the Commissioner of Incometax, Bombay, under S. 66 (1 ). The facts may be briefly stated. A partnership firm consisting of three partners started doing business of manufacturing shoes from 171948 in the firm name of ' Coral and Co. " There was another concern ? The Gaekwar Foam and Rubber Co. which was a limited liability company registered on 2171949. Owing to devaluation of currency, this latter company had difficulties in carrying on its business of foam rubber. It came to the notice of this company, which is the assessee company before us, that the firm of Coral and Co. wanted to sell its business. The assessee company took over all the assets of the business of Coral and Co. including its goodwill for the consideration of Rs. 1,50,000/. The payment was not made in cash but was by allotting 1500 shares of the face value of Rs. 100/ each to the three partners in the firm of Coral and Co. The nominal capital of the assessee company was Rs. 5,03,000/ divided into 5000 ordinary shares of Rs. 100/ each and 3000 'b' shares of Re. 1/ each. Neither the credits and outstandings nor the debts and liabilities of Coral and Co. were taken over by the assessee company. We shall refer to the agreement, which is one of sale, little later in our judgment. In respect of the assessment year 195253, the assessee company claimed the benefit of an exemption from tax under S. 15c on the ground that it was a newly established industrial undertaking. The Income-tax Officer rejected the assessee's contention. According to him, the assessee company was formed by reconstruction of a business already in existence and, therefore, the assessee company was not entitled to the benefit of S. 15c claimed by it. The Appellate Assistant Commissioner took the contrary view. His conclusion was that this was a case of transfer of building and machinery to a new business, and as the business of the transferor came into existence after 141948, the assessee was entitled to the exemption claimed by it. The matter was carried in appeal by the Department and the Tribunal took the view that the Appellate Assistant Commissioner was right in the conclusion reached by him. In its order, it stated:

(2.) IT has been argued before us by Mr. G. N. Josh, learned Counsel for the Revenue, that the Tribunal was in error in interpreting clause (i) of subsection (2) of S. 15c. The argument briefly stated was that this was a case of an industrial undertaking formed by reconstruction of a business already in existence and if it was a newly established industrial undertaking, which was formed by reconstruction of a business already in existence , it could not claim the exemption granted by S. 15c. It will be convenient at this stage to set out that part of s. 15c which is material for the purpose of this Reference:

(3.) THE argument of Mr. Joshi is that an assessee who wants to avail of the benefit of the exemption must fulfill all the conditions and requirements of the Section. That proposition is not disputed. Then, the argument has proceeded that in clause (i) there are three requirements or conditions. We agree with Mr. Joshi that all the three requirements or conditions specified in clause (i) of sub-section (2) must be satisfied before an assessee can claim the benefit of the exemption granted by the Section and the argument in effect has been that since this is a case of reconstruction of a business already in existence, the assessee cannot get any relief. It is suggested by Mr. Joshi that the words at the end of clause (i): "before the 1st day of April, 1948" apply to the third condition or requirement of clause (i) of sub-section (2) and not to all the three conditions or requirements specified in that clause. On the other hand, it has been suggested by Mr. Palkhiwalla that those words apply to all the three requirements or conditions of that clause. It is not necessary for us to decide on this reference whether the words "before 1-4-1948" apply to all the three conditions or requirements of clause (i) of sub-sec. (2 ). We shall, therefore, confine our consideration only to the point, which is directly before us, namely, whether this is a case of reconstruction of a newly established industrial undertaking formed by reconstruction of a business already in existence. If it is not a newly established industrial undertaking formed by reconstruction of a business already in existence, the assessee must succeed because it is not the contention of Mr. Joshi that this is a case of an undertaking formed by splitting up of a business already in existence nor is it the contention of Mr. Joshi that this is not a case of an undertaking formed by transfer to a new business of building, machinery or plant used in a business which was being carried on before 1-4-1948. Mr. Joshi has taken us through the various clauses of the agreement between the firm of Coral and Co. , the vendors and the assessees. On the face of it, it is an agreement of sale of the assets of building, machinery and plant of an industrial undertaking and also of the stock-in-trade of that firm, as we shall presently point out. The sale includes the goodwill of the vendor firm. What is kept out however is the credits and outstandings of the vendor firm and its debts and liabilities. Clause (2) refers to the nominal capital of the transferee company, the assessee. Clause 3 (1) speaks of the operation of the sale and purchase as from 1-3-1950. The agreement is dated 28-2-1950. Then, the goodwill of what is described as "the late company" is mentioned. Then, the right to use the premises occupied by the vendors Is mentioned. Next is mentioned the plant, machinery, furniture and other tools of the vendors. Consideration is mentioned thereafter as being Rs. 1,50,000/- to be paid and satisfied by the allotment to the vendors of 1500 fully paid up ordinary shares of the assessee company of the face value of Rs. 100/- each. The price of the plant, machinery etc. is shown as agreed upon at Rs. 1,43,758 and the goodwill at Rs. 6,242/ -. Then there is a reference to the credits and outstandings and the debts and liabilities of the vendor firm, to which we have already made reference. Then there is stipulation about the indemnity given to the purchaser by the vendors against any proceedings, claims and demands in respect of their debts, liabilities, contracts and previous engagements and in respect of tax. As to stock-in-trade, it is mentioned that it was a matter left to the transferee company whether it should take it up or not. Lastly there is a restrictive condition which restrains the vendors from carrying on a competing business within the area of 100 miles of Bombay. On these stipulations and conditions in the agreement of sale, it is argued by Counsel for the Revenue that this is clearly a case of reconstruction of a business already in existence. Considerable emphasis has been laid by Mr. Joshi on the expression "business" and we propose to bear in mind the importance we are asked to attach to the business of the vendors. It is said that here the goodwill has been transferred. It is said that although the outstandings and liabilities were not taken up, that made no difference. It is then said that the fact that the stock-in-trade was not taken up at the time of the sale made little difference. The argument has been that what is of importance and consequence is that all the assets of the vendor firm were taken up as going concern. Now, we do not think we would be justified in reading this agreement as one under which all the assets of the vendor firm were taken up by the assessee company as a going concern. But at the same time it is true that the premises where its business was being carried on and all the plants, machinery, furniture and other tools of the vendor firm were taken up by this agreement described as one of sale. Then it is said that it was the same persons who are carrying on the business of the assessee company. Here we are unable to accept Mr. Joshi's suggestion. We have carefully read the agreement and the Statement of the case and there is nothing to suggest that it is the same persons, that is, the vendors who are carrying on the business of the assessee company. No such fact has been found by the Tribunal. The capital of the assessee company, as we have already mentioned is Rs. 5,03,000/- and the consideration was that the vendors were to get only 1500 ordinary shares of the face value of Rs. 100/- each allotted to them in payment of consideration. Then it is said that the identity of the vendor firm was completely merged in the assessee company. It cannot be said that this was a case of amalgamation or identity of the vendor firm being merged in the assessee company if it was a transaction of sale. What appears to have happened is that the vendor firm sold its plant, machinery, furniture and tools and ceased to carry on its business. It is the ease of a business of a firm ceasing after the sale of its machinery, plant, etc. when it could not possibly carry on business. The goodwill of that firm, as we have already said, was sold to the assessee company.