JUDGMENT
J.S. Verma, C.J.
1. The Income Appellate Tribunal has stated the case and referred to this court for its decision a question of law in accordance with the direction dated February 13, 1981, given in Misc. Civil Case No. 224 of 1977. The question of law referred is as follows :
” Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding in paragraph 16 of its order that the transaction in question is in the nature of an exchange only ? ”
2. The assessee is a partnership firm which carried on transport business. During the previous year relevant to the assessment year 1955-56, the assessee entered into an agreement dated March 24, 1955, with the Combined Transport Service, Bilaspur, a private limited company, according to which all the 17 passenger buses owned by the assessee-firm were transferred to the company for a total consideration of Rs. 1,51,565 against the written down value of these vehicles amounting to Rs. 31,024. The Income-tax Officer rejected the assessee’s contention and held that the transaction was one of sale by the assessee-firm to the company and, therefore, the amount of Rs. 1,19,541 earned by it in excess of the written down value of the vehicles by this transaction was liable to be assessed as profit under Section 10(2)(vii) of the Indian Income-tax Act, 1922. On appeal, the Appellate Assistant Commissioner affirmed this view and merely corrected some calculation mistake. On further appeal by the assessee, the Tribunal held that the transaction of transfer of these motor vehicles by the assessee-firm to the company was in the nature of “exchange” and not “sale” and, therefore, Section 10(2)(vii) of the Act was not attracted. It is not necessary to refer to the history of litigation prior to the decision of the Tribunal, in its order annexure D, dated May 31, 1976.
3. Aggrieved by this decision of the Tribunal, the Revenue sought a reference and the same having been refused by the Tribunal, an application was made to this court for a direction to refer the above question of law for the decision of this court giving rise to the present reference.
4. The sole question for decision is whether on a proper construction of the terms and conditions of the agreement dated March 24, 1955, the Tribunal was justified in taking the view that the transfer of the motor vehicles by the assessee-firm to the company was an “exchange” and not a “sale”. The applicability of Section 10(2)(vii) of the Indian Income-tax Act, 1922, depends on this conclusion since the provision applies to a sale and not to a mere exchange. The relevant terms of the agreement dated March 24, 1955, may now be referred to. A copy of this agreement was made available at the hearing by Shri Y. S. Dharmadhikari, learned counsel for the assessee, and the same also forms part of the reference in Misc. Civil Case No. 273 of 1973, decided on August 25, 1975, an earlier reference in the same case. A perusal of the agreement shows that it evidences a sale by the assessee-firm to the company of the movable properties specified in the annexed schedule, which include these motor vehicles. The schedule of the agreement gives the particulars of each motor vehicle and mentions its price against it. The total sale price of Rs. 1,51,565 is calculated on the basis of particulars specified against each of these motor vehicles in the said schedule. Thereafter, the agreement says that the sale price would be paid to the assessee-firm by the company in the form of shares of the company of the value of Rs, 500 each in the names of the partners of the assessee-firm as indicated in the agreement. It is also significant that in addition to the shares of Rs. 500 each handed over to the seller (assessee-firm), the balance amount of Rs. 384-13-0 was the cash consideration towards the total sale price of Rs. 1,51,565 required to be paid by the company to the assessee-firm. It is also clear that the transaction by which these motor vehicles were transferred by the assessee-firm to the company was treated by the parties as a sale transaction and this is how it was described not only in the agreement but also for the purpose of transfer of registration of these motor vehicles. The question, therefore, is whether, even on these facts, the transaction can be treated merely as an “exchange” and not as a “sale” as held by the Tribunal.
5. Learned counsel for the parties placed reliance on. three decisions of the Supreme Court. These are: CIT v. Motors & General Stores (P.) Ltd. [1967] 66 ITR 692, CIT v. R. R, Ramakrishna Pillai [1967] 66 ITR 725 and CIT v. B. M. Kharwar [1969] 72 ITR 603. Shri B. K. Rawat, learned counsel for the Revenue, contended that the test laid down in these decisions of the Supreme Court applied to the facts of this case. The undisputed facts of this case clearly show that the transaction was a “sale” to which Section 10(2)(vii) clearly applied. Learned counsel for the assessee, Shri Y. S. Dharmadhikari, however, contended that the transaction was not a “sale” but merely conversion of the assets of the partnership firm (transferor) to that of the company (transferee) and the partners were to be made shareholders of the company by holding the shares in lieu of the sale price of the motor vehicles. It is on this basis that Shri Y. S. Dharmadhikari placed reliance on the decision in CIT v. Motors and General Stores (P.) Ltd. [1961] 66 ITR 692 (SC). In our opinion, the contention of learned counsel for the Revenue must be accepted.
6. The argument of learned counsel for the assessee that the transaction was merely one of conversion of the assets of the partnership firm into that of the private limited company has no foundation since it is not based on the facts found proved. The case has to be decided on the basis that the partnership firm transferred the motor vehicles to the private limited company, both continuing as separate entities for the purpose of transfer and even thereafter. There is thus no question of conversion of the assets of the partnership firm into that of the company. The decision in CIT v. Motors and General Stores (P.) Ltd. [1967] 66 ITR 692, relied on by Y. S. Dharmadhikari, obviously is inapplicable.
7. The test indicated by the Supreme Court in CIT v. B. M. Kharwar [1969] 72 ITR 603, is summarised as under (at page 611):
“Where the person carrying on the business transfers the assets to a company in consideration of allotment of shares, it would be a case of exchange, and not of sale, and the true nature of the transaction will not be altered, because for the purpose of stamp duty or other reasons, the value of the assets transferred is shown as equivalent to the face value of the shares allotted. A person carrying on business may agree with a company that the assets belonging to him shall be transferred to the company for a certain money consideration and that in satisfaction of the liability to pay that money consideration, shares of a certain face value shall be allotted to him. In that case, there are in truth two transactions –one a transaction of sale and the other a contract under which the shares are allotted in satisfaction of the liability to pay the price. The court further observed that Section 10(2)(vii), proviso (ii), on the plain terms used therein, is attracted if there be a sale of the building, machinery or plant and the amount for which the sale takes place exceeds the written down value of the assets transferred. If there he no sale, the proviso has no application.”
8. In our opinion, the transaction in in the present case is of the kind indicated in the latter part of the above test or, in other words, there were two transactions–one a transaction of “sale” of motor vehicles and the other of a contract under which the shares were allotted in satisfaction of the liability to pay the price. The first transaction of sale of motor vehicles clearly attracts Section 10(2)(vii), proviso (ii). The Tribunal was, therefore, not justified in holding that the transaction was not one of “sale” but merely of “exchange”.
9. Consequently, the reference is answered in favour of the Revenue and against the assessee as under :
” On the facts and circumstances of the case, the Tribunal was not right in law in holding that the transaction in question is in the nature of an ‘ exchange ‘ only. ”
10. The assessee shall pay the costs of the Revenue. Counsel’s fee Rs. 500 if certified.