{"id":251042,"date":"1962-03-20T00:00:00","date_gmt":"1962-03-19T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/k-m-s-reddy-commissioner-of-vs-the-west-coast-chemicals-and-on-20-march-1962"},"modified":"2018-07-12T04:55:05","modified_gmt":"2018-07-11T23:25:05","slug":"k-m-s-reddy-commissioner-of-vs-the-west-coast-chemicals-and-on-20-march-1962","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/k-m-s-reddy-commissioner-of-vs-the-west-coast-chemicals-and-on-20-march-1962","title":{"rendered":"K. M. S. Reddy, Commissioner Of … vs The West Coast Chemicals And … on 20 March, 1962"},"content":{"rendered":"
Supreme Court of India<\/div>\n
K. M. S. Reddy, Commissioner Of … vs The West Coast Chemicals And … on 20 March, 1962<\/div>\n
           PETITIONER:\nK.   M.\t  S.  REDDY,  COMMISSIONER  OF\tINCOME-TAX,   KERALA\n\n\tVs.\n\nRESPONDENT:\nTHE   WEST   COAST  CHEMICALS  AND   INDUSTRIES\t  LTD.\t (IN\n\nDATE OF JUDGMENT:\n20\/03\/1962\n\nBENCH:\n\n\nACT:\nIncome Tax-Winding up of business-Realisation of assets-Sale\nduring winding up, if an act of trading-Profits arising\t out\nof sale-Liability to tax.\n\n\n\nHEADNOTE:\nThe  respondent company was incorporated in  1937  primarily\nwith  the object of acquiring and working a  match  factory.\nUnder  the  memorandum of association the company  was\talso\nempowered, inter alia, to manufacture and deal in chemicals.\nThe business of manufacturing matches was carried on by\t the\ncompany\t till 1941.  Thereafter the profits became less\t and\nless  due  to war conditions.  On May 9, 1943,\tthe  company\nentered into an agreement with a third party for the sale of\nthe  lands,  buildings,\t plant and machinery  of  its  match\nfactory\t for  Rs. 5,75,000.  It was agreed that\t this  price\nwould  not include manufactured goods, chemicals  and  other\njaw materials or any other asset not shown in the  agreement\nof  sale.   Later,  a fresh agreement was  entered  into  on\nAugust 9, 1943, under which the sale included chemicals\t and\npaper  for manufacture which had not been sold in the  first\ninstance and the price was Rs. 7,35,000.  In a report to the\nshareholders dated August 1, 1944, the Directors stated that\nthe price obtained had shown a capital appreciation of about\nsix times the cost price and that the sale of chemicals\t had\nresulted   in'\tsubstantial  profit.   In  proceedings\t for\nassessing income which had escaped assessment the income-tax\nauthorities,  relying  upon the\t memorandum  of\t association\nwhich allowed the\n\t\t\t    961\ncompany\t to  manufacture  and  sell  chemicals\tand  on\t the\nDirectors' report, held that the profit from the sale of the\nchemicals  and other raw materials was liable to  income-tax\non  a profit of Rs. 2,00,000 which was reduced later to\t Rs.\n1,  15,259.   The  company claimed that\t the  stock  of\t raw\nmaterials was sold not in the course of ordinary trading but\nonly in a realisation sale after the company had been  wound\nup. The evidence showed that the clause in the memorandum of\nassociation  giving power to the company to  sell  chemicals\nwas  seldom used and that prior to the sale of chemicals  to\nthe  purchaser,\t two transactions of sale of  chemicals\t for\nsmall amounts in 1943 were too petty in themselves to afford\nevidence of trading in chemicals.\nHeld, that though under the second agreement dated August 9,\n1943,  more  price  was paid, the transaction  was  still  a\nwinding\t up  sale  and\tno part\t of  this  slump  price\t was\nidentifiable  as  the price of the chemicals and  other\t raw\nmaterials.  There was no evidence that before the winding up\nthe company had sold chemicals as part of its business,\t and\nthe  two  instances cited were too petty  in  themselves  to\nafford\tevidence  of  a continued or  sustained\t trading  in\nchemicals.   A\twinding\t up sale is not\t \"trading  or  doing\nbusiness\"  and the sale of the raw materials  including\t the\nchemicals was not part of any business done.\nAccordingly, the sum of Rs. 1,15,259 was not liable to tax.\nDoughty\t  v  Commissioner  of  Taxes,  (1927)  A.  C.\t327,\ndi.',Cussed and relied on. Case law reviewed.\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 286 of 1961.
\nAppeal\tfrom the judgment and order dated January 27,  1960,
\nof the Kerala High Court in
\nI.   T. R. Case No. 14 of 1955.\n<\/p>\n
K.N. Rajagopal Sastri and D. Gupta, for the Appellant.
\nS.P.  Desai  J. B. Dadachan , O. C. Mathur  and\t Ravinder
\nNarain, for the respondent.\n<\/p>\n
1962.  March 20.  The Judgment of the Court was delivered by
\nHIDAYATULLAH,  J.-  In this appeal by  the  Commissioner  of
\nIncome Tax Kerala filed with
\n962<\/span>
\n certificate  of  the  High Court of  Kerala,  an  important
\nquestion of law was raised before the High Court, which\t was
\nanswered against the Department.  It arose in the  following
\n,circumstances.\t  The respondent, the West  Coast  Chemicals
\nand  Industries, Ltd. (referred to as the assessee  Company)
\nwas  incorporated  in  1937 primarily  with  the  object  of
\nacquiring  and working the- rights, title and interest in  a
\nmatch factory belonging to one A. V. Thomas at Medical.\t The
\nMemorandum of Association of the asseesee Company,  however,
\nempowered  the\tCompany to manufacture and  deal  in  acids,
\nalkalis and other chemicals.  The assessee ‘Company  carried
\non  its business of manufacturing matches till\tthe  account
\nyear  ending,  on April 30, 1941.  Thereafter,\tthe  profits
\nfrom   the  business  became  less  and\t less  due  to\t War
\nconditions,  and the assessee Company began  to\t manufacture
\nplywood\t chests for tea, paints and lemon grass oil.   These
\nwere   contemplated  by\t cl.  (3)  of  the’  Memorandum\t  of
\nAssociation.\n<\/p>\n
On  May,  9,  1943, the assessee  Company  entered  into  an
\nagreement with one Rao Sahib Natesa Iyer for the sale of the
\nlands,\tbuildings, plant and machinery of its match  factory
\nfor  Rs. 5, 75,000.  It was agreed that the price would\t not
\ninclude\t  manufactured\tgoods,\tchemicals  and\t other\t raw
\nmaterials  or any other asset not shown in the agreement  of
\nsale.  The purchaser was allowed sixty days for the  payment
\nof the balance of the price, Rs. 57,500 having been  already
\npaid  at  the  time the agreement was  ‘entered\t into.\t The
\npurchaser made a default in payment, and on August 9,  1943,
\na  fresh  agreement was entered .into by the  parties,\tthis
\ntime  for  a  consideration of Rs. 7,35,000,  and  the\tsale
\nincluded  chemicals and paper for manufacture which had\t not
\nbeen  sold in the first instance.  In a confidential  report
\nmade on August 1, 1944, to the shareholders, the
\n 963<\/span>
\nDirectors stated that the price obtained had shown a capital
\nappreciation of about six times the cost price, and the sale
\nof chemicals had also resulted in a substantial profit.
\nMeanwhile,  the assessment of the Company for  the,  account
\nyear ending April 30, 1944, bad been completed by the Deputy
\nCommissioner  of  Income-tax, and the assessee\tCompany\t had
\nbeen  assessed on an income of Rs. 36,498-6-4.\t The  Deputy
\nCommissioner of Income-tax then issued a notice under s.  25
\nof the Travancore Income-tax Act to the Company’s Liquidator
\non  the\t ground\t that  the profits  from  the  sale  of\t the
\nchemicals and paper for manufacture had escaped\t assessment.
\nThe Official Liquidator took up the position that the  match
\nmanufacturing  had been stopped, and that business had\tbeen
\nwound up, and there thus only an appreciation of the capital
\nassets\tand  not  a business profit, which,  was  liable  to
\nassessment.  The Deputy Commissioner, however, relying, upon
\nthe  Memorandum of Association, which allowed  the  assessee
\nCompany\t to  manufacture  and sell  chemicals,\tand  on\t the
\nDirectors report, held that the assessee Company was  liable
\nto  income-tax on a profit of Rs. 2 lakhs arising from\tthis
\nsale.\tThe Commissioner of Income-tax on  appeal,  however,
\nreduced the assessable profits to Rs. 1,15,259.\t Before\t the
\nCommissioner,  the Liquidator admitted that the profit\tfrom
\nthe sale of the chemicals wits Rs. 1, 15,259.
\nAn  appeal  was then filed before the  Income-tax  Appellate
\nTribunal  at Trivandrum, and the assessee Company  contented
\nthat  a\t stock-in-trade\t could only be that  which  was\t the
\nsubject\t of trade, and that the stock of raw  material\t was
\nnot  sold in the course of ordinary trading but in a  reali-
\nsation\tsale  after  the  Company had  been  wound  up.\t The
\nTribunal found that the business had not
\n\t  964<\/span>
\ncompletely  ceased to exist, since the assessee Company\t was
\ncarrying on manufacturing, on behalf of\t     the  purchaser,
\nand, the sale could not be regarded\tas   a\t realisation
\nsale   after  the  Company  was\t wound\tup,  but   had\t the
\ncharacteristics\t of  a trading sale. At the request  of\t the
\nassessee   Company,  however,  the  Tribunal  referred\t two
\nquestions to the High Court for its decision, and they were:
\n “(1)  whether the transaction of sale of  the
\n\t      raw      materials     along     with\t the
\n\t      business,including   machinery,\tplant\t and
\n\t      premises is a revenue sale, and whether in the
\n\t      facts  and circumstances of the case, the\t sum
\n\t      of  Rs.  1,15,254has been rightly\t charged  to
\n\t      income-tax; and
\n\t      (2)  whether  the decision that  the  sale  of
\n\t      match,  machinery and premises,  was  distinct
\n\t      from  the\t sale of chemicals is  legally\twar-\n<\/p>\n
\t      ranted and whether there was legally a single,
\n\t      transaction   of\tthe  entire  match   factory
\n\t      inclusive of raw materials?”\n<\/p>\n
It maybe pointed out that prior to the sale of chemicals  to
\nthe purchaser, the only evidence of sale of chemicals by the
\nassessee  Company  was of two transactions.   In  the  first
\ntransaction,  there  was  a sale of chemicals  on  July\t 24,
\n1943,to\t an educational institution for Rs. 50\tand  another
\nsale on October 30, 1943, to a stranger for Rs. 7-12-0.\t The
\nHigh  Court held that by the sale no business was done,\t and
\nthat the amount obtained was only by way of realisation sale
\nand was not, therefore, liable to tax.\n<\/p>\n
‘rho argument of the Department (also raised before the High
\nCourt)\tproceeds in this way.  The Department refers to\t the
\nMemorandum  of Association under which the assessee  Company
\nwas to carry on the business of manufacturing and
\n 965<\/span>
\nselling\t chemicals, that in the past it bad sold  chemicals,
\nthat  in  the  first  sale of its  assets  it  had  excluded
\nchemicals  and\tsome other raw materials necessary  for\t the
\nmanufacture of matches and had sold the concern for a lesser
\nprice,\tthat later it included chemicals and  raw  materials
\nand obtained a larger price, and that admittedly ‘there\t was
\nan  identifiable profit of Rs. 1,15,259 on the sale  of\t the
\nchemicals  and\traw materials.\tThe  Department,  therefore,
\ncontends  that\tthe  amount of Rs. 1,  15,259  was  properly
\nbrought\t  to  tax  as  a  trading  profit.   The   question,
\ntherefore, is whether there can be said to be a sale in\t the
\ncarrying on of the business in respect of the chemicals\t and
\nother  raw  materials.\t This question is not  one  easy  to
\ndecide,specially  with the assistance of rulings,  in  which
\nthe  facts  were  different.  There is\ta  great  danger  of
\nextracting  a  principle from the reported  cases,  divorced
\nfrom  the facts.  In Halsbury’s; Laws of England, 3rd  Edn.,
\nVol.  20, pp. 115-117, there is a list in the  footnotes  of
\nthe  cases which have been decided on one side or the  other
\nof  the dividing line.\tIn the text, the law, as  summarised
\nfrom the cases, is stated as follows :-\n<\/p>\n
\t      “210.   Mere  realisation\t of  assets  is\t not
\n\t      trading;\tbut  the completion  of\t outstanding
\n\t      contracts after the dissolution of a firm, the
\n\t      commencement  of liquidation of a company,  or
\n\t      the winding up of the affairs of a trader, has
\n\t      been held to be trading…….\n<\/p><\/blockquote>\n
\t      211  … The cases illustrating  the  question
\n\t      arising  in such circumstances can be  divided
\n\t      into  two categories, first, those  where\t the
\n\t      sales formed part of trading activities,\tand,
\n\t      second, those where the realisation was not an
\n\t      act of trading”.\n<\/p><\/blockquote>\n
This distinction, in our opinion, is a sound one.  The\tonly
\ndifficulty is in deciding whether a particular
\n966<\/span>
\ncase  belongs to one category or the other.  In\t this,\tmuch
\nsupport\t cannot\t be  derived  from  observations    made  by
\nlearned Judges pertaining to the facts of   a case, but they
\ndo guide one in a true appraisement of the case in hand.
\nIn  the well-known case of Californian Copper  Syndicate  v.
\nHarris\t(1), the difference between the purchase  price\t and
\nthe value of the shares for which the property was exchanged
\nwas  considered as profit assessable to income-tax.   There,
\nthe  company  was formed for the purpose  of  acquiring\t and
\nreselling mining properties, and though what it had acquired
\nhad  all  been\tBold  or  exchanged,  the  transaction\t was
\nconsidered a business transaction failing within the  avowed
\nobjects,  of  the Company.  The case has  been\taccepted  as
\ndecided\t on  these narrow facts, in Tebrau  (Johore)  Rubber
\nSyndicate   Ltd.  v.  Farmer  (2),  in\twhich  a   different
\nconclusion  was reached on slightly different facts.   There
\nalso,  the Company was formed with the object  of  acquiring
\nrubber\testates\t and for developing them.  Under  the  Memo-
\nrandum,\t the Company had the power to sell  its\t properties.
\nTwo properties having been acquired and the funds having run
\nout,  they  were  sold but at a\t profit.   This\t profit\t was
\nconsidered  as\tan  appreciation  of  capital  and  not\t  as
\nassessable  profit.  The difference between these two  oases
\nis  that  whereas  in the former, though the  whole  of\t the
\nproperty was sold, it was sold at; a part of trading, in the
\nletter, the property was sold not as part of trading but  on
\na winding up sale.\n<\/p>\n
The  Department relies upon Californian Copper Syndicate  v.
\nHarris\t(1),while  the assesse Company\trelies\tupon  Tebrau
\n(Johore)Rubber\tSyndicate Ltd. v. Farmer (2) .\tThese  cases
\nwere  also  considered and applied by the Privy\t Council  in
\nDoughty\t v. Commissioner of Taxes (3), which is relied\tupon
\nby
\n(1) [1904] 5 T.C. 159.\t      (2)  [1910] 5 T.C. 658.
\n(3)  [1927] A.C. 32
\n 967<\/span>
\nboth  sides, in view of certain observations of\t the  Privy.
\nCouncil,  to which we shall presently refer.. In that  case,
\nthere were two partners carrying on business in New  Zealand
\nas  general  merchants.\t  They sold  the  partnership  to  a
\nlimited\t company, of which they were the only  shareholders.
\nThe  sale was of the entire assets including  the  goodwill,
\nand the price was payable in the shape of fully paid  shares
\nin  the\t new company.  The nominal value of the\t shares\t was
\nmore  then the capital account as shown in the last  balance
\nsheet,\tand  the partners prepared a new  balance  sheet  in
\nwhich  a  larger value was placed upon\tthe  stock-in-trade.
\nThe  Income-tax\t authorities  in  New  Zealand\ttreated\t the
\ndifference between the value placed on the stock-in-trade in
\nthe  old  balance sheet and that placed in the\tnew  balance
\nsheet  as  a profit liable to tax.  The Privy  Council\theld
\nthat this was wrong, pointing out that for profit to  arise,
\nthere  must  be a trading, and that a mere alteration  of  a
\nbook-keeping  entry was not evidence that there was  profit.
\nIt  also  held that the sale was of the entire\tassets,\t and
\nthat the price represented a payment for the entire business
\nwithout a separate sale or valuation of this  stock-in-trade
\nfor  purposes  of sale.\t It referred to\t two  cases  decided
\nrespectively  by the Supreme Court of New Zealand  and\tthe,
\nHigh Court of Australia, in which sales by pastora-lists  of
\ntheir  flock of sheep had taken place.\tIn the\tNew  Zealand
\ncase, the excess obtained over the book value was treated as
\nassessable  profit, but in the Australian case, it was\tnot.
\nBoth the sales were of the entire stock.  The Privy  Council
\napproved  of the Australian case, and though it did not\t ex-
\npressly dissent from the New Zealand case, it indicated that
\nit found it difficult to appreciate the decision.  These two
\ncases  from  New’  Zealand and Australia  were,\t of  course,
\nrelied\tupon  by the rival parties before us, and  we  shall
\nconsider them.\n<\/p>\n
968<\/span><\/p>\n
The Australian case is Commissioner of Taxation (W.  A.)  v.
\nNewman\t(II.   A person who carried on business\t in  Western
\nAustralia  as a pastoralist sold his property including\t all
\nlive-stock and plant, as a going concern.  The\tCommissioner
\nof Taxation for the State apportioned the purchase money  in
\nrespect of the live-stock, and assessed the amount which was
\nreceived  in  excess, as income derived from carrying  on  a
\nbusiness.  The High Court held that the transaction was\t not
\nduring\tthe  carrying  on of the business or  even  for\t the
\npurpose of carrying on the business, but was for the purpose
\nof putting an end to the business, and that thus the  excess
\nrepresented a capital appreciation and not a trading profit.
\nThe Now Zealand case is Anson v. Commissioner of Taxes\t(2).
\nIn  that case also, a sheep farmer sold his entire stock  of
\nsheep.\t He had the practice of placing on his sheep at\t the
\nbeginning  and end of each year an arbitrary  value  without
\nreference  to  the, actual market value.  When he  sold\t his
\nentire stock, a nominal profit of pound 5,000 odd  appeared,
\nand  he was assessed on it.  The Supreme Court hold that  it
\nwas not an accretion to capital but a profit on the sale  of
\nthe  appellant’s  stock-in-trade.   Sir\t John  Salmond,\t who
\ndelivered  the judgment of Court, observed that the  holding
\nof  a sheep farmer was not a capital holding, but his  sheep
\nrepresented  a stock-in-trade, and since every\tappreciation
\nof  a  stock-in-trade  represented a  profit  assessable  to
\nincome-tax, it mattered not that the stock-in-trade was sold
\nat  once  or  from time to time.  Of this  case,  the  Privy
\nCouncil\t in Doughty’s case (3) did not say much, but  enough
\nto  cast  a doubt upon it.  This is what the  Privy  Council
\nsaid at p. 335.\n<\/p>\n
\t      “It would be difficult to arrive at the profit
\n\t      in this way if it were the case of a
\n\t      (1)  [1921]  2  9\t C.L.R.\t 484.\t(2)   [1922]
\n\t      N.7.L.R. 330.\n<\/p><\/blockquote>\n
\t      (3) [1927] A. C. 327.\n<\/p><\/blockquote>\n
\t      969<\/span><\/p>\n
\t      farmer in England but the trade of a  pastora-
\n\t      list is one with which the New Zealand  Courts
\n\t      would be familiar, and which it would be\tmore
\n\t      easy for the New Zealand Judges than for their
\n\t      Lordships to appreciate.”\n<\/p><\/blockquote>\n
The  Privy Council made a distinction between a sale of\t the
\nentire\tstock  as a part of trading and a sale of  the\tsame
\nstock  as  a  winding  up sale.\t It  observed  that  if\t the
\nbusiness be one of purely buying and selling, “a profit made
\nby  the\t sale  of the whole of the stock,  if  it  stood  by
\nitself,\t might\twell  be  assessable  to  income-tax”.\t  It
\nobserved  that in Dougherty’s case (1) the sale was a  slump
\ntransaction,  and  was a winding up of the  business  rather
\nthan a trading.\t The Privy Council further pointed out\tthat
\nthere is a difficulty in deciding cases of a business, which
\ninvolve\t breeding of sheep for the purpose of  selling\twool
\nThis is quite true, because the sheep may be regarded as the
\ncapital, with which the wool, which is sold, is produced, or
\nthe  sheep  with  the wool on them may be  regarded  as\t the
\nstock-in-trade.\t  Such\ta question,  fortunately,  does\t not
\narise  in  the-present\tcase, which can be  decided  on\t the
\nnarrow\tground whether the business was being wound  up\t and
\nthe  sale, a realisation sale, or whether trading was  going
\non  in\tspite  of the winding up, so as to  attract  tax  on
\nprofits made.\n<\/p>\n
Before\twe answer this question in relation to the facts  of
\nthis case, we wish to refer to a’ few more cases, which were
\ncited  before  us.   In\t J.  &\tR.  O’Kane  &  Co.  v.\t The
\nCommissioners of Inland Revenue (2), the appellants  carried
\non business as wine and spirit merchants.  They then  wished
\nto  retire from the business and sent a circular  letter  to
\ntheir  customers.   During the year, they sold\ttheir  *bole
\nstock  to diverse customers.-, and the question was  whether
\nthey were still carrying on their trade during that  period,
\nand whether the profits were thus made in the
\n(1) [1927] A.C. 327.\n<\/p>\n
\t\t  (2) [1922] 12 T.C. 303.\n<\/p>\n
970<\/span><\/p>\n
ordinary  course of trade.  It was held by the King’s  Bench
\nDivision  of the High Court of Justice in Ireland  that\t the
\nsales were not in the ordinary course of trade but were part
\nof  the realisation of the trading stock and winding  up  of
\nthe  business,\tand thus not liable to tax.   The  Court  of
\nAppeal\tin Ireland unanimously reversed the decision of\t the
\nHigh  Court.   Ronan,  L. J., pointed out  that\t though\t the
\ntaxpayer\t   had retired from business and had decided
\nnot to purchase any more stock, he was still carrying on the
\nbusiness  of trading in wines and spirits till his  existing
\nstocks\twere exhausted, and, therefore, the excess  obtained
\nby him represented profit.  On appeal to the House of Lords,
\nit   was  held\tthat  there  was  evidence  on\t which\t the
\nCommissioners  could  arrive at their finding  that  trading
\nwas,  in fact, being carried on.  Lord Buckmaster,  speaking
\nOf the facts in that case, observed as follows :\n<\/p>\n
\t      “For in truth it is quite plain that right  up
\n\t      to the en of 1917 they were engaged in trading
\n\t      which,  so  far  as  the\texternal  world\t  is
\n\t      concerned, was the ordinary method of carrying
\n\t      on  trade modified only by arrangements  which
\n\t      were merely part of the machinery of  business
\n\t      dealing  adopted to effect their intention  to
\n\t      retire.  It may well be accepted that they did
\n\t      so intend ; yet the intention of a man  cannot
\n\t      be  considered as determining what it is\tthat
\n\t      his  acts amount to; and the real\t thing
\n\t      that  has to be decided here is what were\t the
\n\t      acts  that were done in connection  with\tthis
\n\t      business and whether they amount to a  trading
\n\t      which would ’cause the profits that accrued to
\n\t      be profits arising from a trade or business
\nThe  case  was,\t therefore, decided on the  finding  of\t the
\nspecial\t Commissioners, for which there was enough  material
\nin evidence.  Similarly, the case
\n\t\t\t    971<\/span>
\nof  The\t Commissioner of Inland Revenue v.  “Old  Bashmills”\n<\/p><\/blockquote>\n
Distillery Co., Ltd. (in Liquidation) (1) was one decided on
\na finding, in support of which there was evidence.  The\t two
\ncases relied upon by the Department and the assessee Company
\nrespectively  do not shed any light upon the problem  before
\nus’ because the central decision in both of them was whether
\nthe Commissioners’ finding was justified or not.
\nIn  J. and M. Craig (Kilmarnock),Ltd.  v.  Cowperthwaite(2),
\nthe  question  was how the opening .stock should  have\tbeen
\nvalued,\t And  whether  any  profit could  be  said  to\thave
\nresulted.  The Privy Council in Doughty’s case (3)  remarked
\nabout this case as follows:\n<\/p>\n
\t      “There, on a transference from one company  to
\n\t      another, one-third of the value of each  item,
\n\t      other than stock in trade, as it stood in\t the
\n\t      books  of the selling company, was treated  as
\n\t      its  value  for  transfer\t purpose,  and\t the
\n\t      balance of a slump price, which, with an under
\n\t      taking to discharge\t\tliabilities,
\n\t      formed  the consideration,  was  inferentially
\n\t      attributable  to\tthe  stock.   It  was  held,
\n\t      however,\tin  that case that no sum  could  be
\n\t      pitched upon as the actual price of the stock,
\n\t      and no claim to assess a profit could be based
\n\t      upon such a foundation.”\n<\/p><\/blockquote>\n
This  case  shows that where a slump price is  paid  and  no
\nportion\t is attributable to the stock-iii-trade, it may\t not
\nbe  possible to hold that there is a profit other than\twhat
\nresults\t from the appreciation of capital.  The\t essence  of
\nthe  matter  however, is not that an extra amount  has\tbeen
\ngained\tby the selling out or the exchange but\twhether\t it-
\ncan fairly
\n(1) (1926) 12 T.C. 1148.\t   (2) (1914) 13 T.C. 627
\n(3)  (1927) A.C. 327.\n<\/p>\n
972<\/span><\/p>\n
be  said that there was a trading from which  alone  profits
\ncan  arise  in\tbusiness.  If this test is  applied  to\t the
\npresent case, then the true answer would be the one given by
\nthe High Court in the judgment under appeal.
\nThere  is no doubt, in this case, that the assessee  Company
\nwas wound up at least in so far as its match manufacture was
\nconcerned.   That the business of the Company was sold as  a
\ngoing  concern,\t and was, in fact, worked  by  the  assessee
\nCompany on behalf of the buyer till the entire consideration
\nwas paid, makes no difference, because the agreement clearly
\nindicated that the, assessee Company was keeping the factory
\ngoing,\tnot on its own behalf but entirely on behalf of\t the
\nbuyer.\tOne cannot fairly say, therefore, that a sale of the
\nchemicals  and\traw  materials\tfor  match  manufacture\t was
\nanything  more\tthan a winding up sale, not with a  view  to
\ntrading in chemicals and raw material but to close down\t the
\nbusiness and to realise the assets.  There was, in fact,  no
\nidentifiable  price  for  the chemicals\t and  raw  materials
\nexcept by comparing the two prices offered to be paid by the
\nbuyer,\tthat is to say, the price without the chemicals\t and
\nraw  materials\tand the price with them.  From\tthat  alone,
\nhowever,  it is impossible to infer that the  chemicals\t and
\nraw  materials were sold in the ordinary way of business  or
\nthat  the assessee Company was carrying on a  trading  busi-
\nness.  The fact that the clause in the Memorandum gave power
\nto  the\t Company to Bell chemicals cannot be  used  in\tthis
\nconnection,  because  the evidence clearly shows  that\tthat
\nclause was never used and the two sales of chemicals through
\nthe years were too petty in themselves to afford evidence of
\na  continued  or  sustained trading In\tchemicals.   In\t our
\njudgment,  this\t was  a\t winding up  sale  with\t a  view  to
\nrealising the capital assets of the assessee
\n\t\t\t    973<\/span>
\nCompany and not a sale in the course of business operations,
\nwhich alone would had attracted tax, if profit resulted.
\nIn the result, the appeal fails and is dismissed with costs.
\nAppeal dismissed.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India K. M. S. Reddy, Commissioner Of … vs The West Coast Chemicals And … on 20 March, 1962 PETITIONER: K. M. S. REDDY, COMMISSIONER OF INCOME-TAX, KERALA Vs. RESPONDENT: THE WEST COAST CHEMICALS AND INDUSTRIES LTD. (IN DATE OF JUDGMENT: 20\/03\/1962 BENCH: ACT: Income Tax-Winding up of business-Realisation of assets-Sale during […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-251042","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nK. M. S. 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