A. K. KHAN PLYWOOD CO. Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This appeal, by special leave, arises in the following circumstances:

(2.) The appellant was a partnership firm consisting of two partners namely, Mr. A. K. Khan and his wife Begum Shamsun Nahar Khan, each having eight annas share. The partners of the firm carried on the business of manufacture and sale of plywood, tea, chests, etc., Under the name and style of M/s. A. K. Khan Plywood Company. In April, 1957, the two partners formed a private limited company styled as M/s. A. K. Khan Plywood Company Limited. The only shareholders of the private company were the two partners of the firm and the shares allotted to each of them in the private limited company were in the same proportion as the shares they held in the firm. The running business of the firm, along with all its assets and liabilities, was sold by the firm to M/s. A. K. Khan Plywood Company Ltd. on the 30th June, 1957 and actual possession thereof was handed over on the 1st July, 1957. The firm submitted its return for the assessment year 1958-59, which corresponds to the accounting period ending 30th June, 1957. It was assessed to a total income of Rs. 2, 72,955/-. This amount included a sum of Rs. 2,13,349/-, which was deemed to be a profit of the firm under the 2nd proviso to section 10(2) (vii) of the Income Tax Act (hereinafter called the Act). It was found that the original cost of the assets of the firm was Rs. 5,89,316/-, but its written down value was Rs. 3,75,967/-, and since the sale to the company by the firm of its assets was for the original cost of the said assets, namely, Rs. 5,89,316/-, the partnership firm was taken to have made a profit of Rs. 2,13,349/- within the meaning of section 10(2) (vii) of the Act, the same being the difference between the original cost and the written down value. The assessee firm filed an appeal directly to the Income-tax Tribunal challenging the inclusion of Rs. 2,13,349/- in the total income of the assessee. The contention was that there being no commercial sale of assets, taxable profit did not accrue and as such the provisions of section 10(2) (vii) did not apply. This contention found favour with the Tribunal. The High Court of East Pakistan, however, on a reference under section 66(1) of the Act, held that the transaction between the partnership firm and the limited company was a sale within the meaning of the second proviso to section 10(2) (vii) and that it resulted in a profit of Rs. 2,13,349/- and, as such, the said sum was liable to tax.

(3.) Leave to appeal was granted to consider the question of law that arises in this case as this is a case of first impression and the question of law is of general application.