Maharajadhiraja Sir Kameshwar Singh vs Commissioner Of Income-Tax, Bihar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Not extracted

Decision Date: 14 April 1959

Coram: M. Hidayatullah, N.H. Bhagwati

In this case the Supreme Court recorded that the appeal, which was entertained by special leave under article 136 of the Constitution, challenged a decision of the Patna High Court. The High Court had declined to direct the Income-Tax Appellate Tribunal to frame a specific question of law and to refer that question for determination. The precise legal issue involved whether, considering the facts and circumstances, the sum of Rs 1,30,785—being the excess of the sale proceeds of the building, plant and machinery over the written-down value of the newspaper publishing business—could be classified, under law, as income, profits or gains of the appellant.

The facts giving rise to the appeal were summarised as follows. The appellant, Maharajadhiraja Sir Kameshwar Singh, had been the sole proprietor of a publishing enterprise that produced two newspapers, “The Indian National” and “Aryavart.” The business possessed certain fixed assets, namely a building, machinery and plant. The Income-Tax authorities, during several assessment years, had permitted the appellant to claim depreciation on these assets. In the accounting year 1356 Fasli, which corresponded to the assessment year 1950-51, the appellant reorganised the enterprise by converting the sole proprietorship into a private limited company. The entire share capital of the newly formed company was provided by the appellant himself, who subscribed for and paid the full amount of the capital. Consequently, the publishing business and its assets were transferred from the appellant’s sole proprietorship to the new company. As consideration for this transfer, the appellant received 25,000 shares of the company; he retained 24,950 shares in his own name and, at his direction, allotted the remaining 50 shares to nominees as director-qualification shares.

On the occasion of the transfer, a valuation of the transferred assets was prepared. The written-down value of the building as on 30 September 1948 stood at Rs 29,669, while its original cost, including subsequent additions, amounted to Rs 49,270. The written-down value of the machinery and plant as on the same date was Rs 1,19,368, against an original cost—including additions—of Rs 2,30,552. The difference between the original costs and the written-down values summed to Rs 1,30,785, which represented the total depreciation that the Income-Tax authorities had allowed on those assets up to that date. When the assets were valued for the purpose of the transfer, the building, together with its additions, showed an appreciation of Rs 54,599, and the machinery and plant, together with their additions, showed an appreciation of Rs 1,51,744. Accordingly, the total appreciated value of the assets amounted to Rs 2,06,343, which exceeded the depreciation amount of Rs 1,30,785.

In the assessment of the appellant for the year 1950-51, the Income-tax Officer held that the appellant had transferred the building, plant and machinery to a private limited company at a value higher than their written-down values. The officer observed that the difference between the original cost and the written-down value amounted to Rs 1,30,785, whereas the sale price, based on the valuation, was Rs 2,06,343. Accordingly, the officer concluded that the entire excess of Rs 1,30,785 represented income, profit or gain in the hands of the appellant and therefore should be taxed for that assessment year, and he assessed that amount. The appellant’s appeal before the Appellate Assistant Commissioner was dismissed, and a further appeal to the Income-tax Appellate Tribunal also failed. After those dismissals, the appellant moved before the Tribunal for a declaration that the specific question concerning the taxability of the Rs 1,30,785 excess should be stated and referred to the High Court under section 66(1) of the Income-tax Act. The Tribunal declined to refer the question. The appellant then filed an application under section 66(2) of the Act before the High Court, requesting that the High Court order the Tribunal to state a case and refer the question, together with other matters, to the High Court for decision. The High Court refused to issue such an order, and the appellant consequently filed the present appeal.

The counsel for the appellant submitted that the determination of whether the sum of Rs 1,30,785, being the excess of the sale proceeds over the written-down value, could be characterized as income, profit or gain, was a pure question of law. Accordingly, the High Court should have directed the Income-tax Appellate Tribunal to state a case and refer that legal question for its determination. The counsel relied upon the decisions in Doughty v. Commissioner of Taxes, Commissioner of Income-tax v. Sir Homi Mehta’s Executors, and Kikabhai Premchand v. Commissioner of Income-tax. It was argued that the real issue was whether the transaction constituted a sale by the appellant to a newly formed private limited company that was not truly separate from the appellant himself, and whether any profit arising from the transfer of assets from the appellant as proprietor to the newly created company could be treated as profit in the ordinary commercial sense. The counsel further contended that, in view of the majority judgment in Kikabhai Premchand, the court possesses the authority to disregard the corporate veil and inspect the actual parties to a transaction, and that under that principle the present case fell within the proposition that no individual may earn profit through such a device.

The Court stated that it was not required at this stage to give any opinion on the substantive merit of the appellant’s contention that the transaction in question did not give rise to taxable income. The Court emphasized that the contention raised a pure question of law, namely whether the excess amount received from the sale of the building, plant and machinery over their written-down value could legally be characterised as income, profit or gain of the petitioner. The appropriate forum for deciding such a question of law, the Court observed, was the High Court, and the Income-Tax Appellate Tribunal should have referred the matter to that Court for determination. However, the Tribunal declined to “state a case” and consequently refused to send the question to the High Court. When the appellant thereafter approached the High Court directly, the Court held that, exercising its powers under section 66(2) of the Income-Tax Act, the High Court ought to have directed the Tribunal to state a case and to refer the legal question to it for a decision. The Court further noted that the formulation of the question as presented by counsel was not precise. Consequently, the Court re-phrased the question in clearer terms, asking: “Whether, having regard to the facts and circumstances of the case, the sum of Rs 1,30,785, which represents the excess of the sale proceeds of the building, plant and machinery over their written-down value, can in law be described as income, profit or gain of the petitioner?”

Having clarified the proper question for determination, the Court allowed the appeal and directed that the re-phrased question be transmitted to the High Court for resolution under its jurisdiction conferred by section 66(2) of the Indian Income-Tax Act. The Court further ordered that the costs incurred by the appellant in the reference before the High Court would be charged to the appellant, while the respondent would bear his own costs in respect of this appeal regardless of the outcome. Accordingly, the appeal was allowed.