# COMMISSIONER OF INCOME TAX v. MUGNEERAM BANGUR & CO

- **Citation:** [1965] 3 S.C.R. 611
- **Court:** Supreme Court of India
- **Decided:** 1965-03-31
- **Case number:** ' Civil Appeal No. 310of1964
- **Bench:** K. Subba Rao, J. C. Shah, S'. M. S!Kri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-v-mugneeram-bangur-co-3519
- **Pages:** 8

## Headnote

Income-tax Act (11 of 1922)-Sale of going concern-Slump price
B
-When part attributable to stock-in-trade.
a
D
E
F
G
The business of the assessee firm, carrying on land development
business was sold as a going concern to a company· promoted by the
assessee ::; partners. The purchase price included sums for th.e val':1e
of land, goodwill, etc. The amount shown as the valuie of th.e goodWlll
\?as sought to be aseessed to income-tax on the grounds (1) that the
assessee's business was purely one of buying and selling land and (ii)
the amount was profit attributable to the sale of land which was
the stock-in-trade of the assessee. In appeal to this Court.
HELD: On the facts of this case it could not be said that the
£ssessees were carrying on the business of l)Urely buying and selling
land. They were engaged in buying land, developing it and then
selling it. The sale was the sale of the whole concern and no part of
the slump price was attributable to the cost of the land. If that was
so, no part of it was taxoble. [617H-618A, E]
Commissioner of Income-tax, Kerala v. We.st Coast Chemical and
Industries Ltd. 46 IT.R. 135 and Doughty v. Commissioner of Taxes
(1927) A.C. 327, applied.
In the case of a concern carrying on the business of buying land,
developing it a-·! the selLing it, it is easy to distinguish a realisation
sale from an ordinarv sale. and it is verv difficult to attribute part of
the slump price to the cost of land sold in the realisation sale. The
mer~ fact that in the schedule the price of land was stated did not
lead to the conclusion that part of the slump price was necessarily
attributable to the land sold. There was no evidence that any attempt
was made to evaluate the land on the date of sale. As the assessees
\Vere transferring the concern to a company, c0nstituted by the assessees themselves, no effort would ordinarily have been made to
evaluate the land as on the date of sale. r618B-D]

## Text

,
A
COMMISSIONER OF INCOME TAX
v.
MUGNEERAM BANGUR & CO.
March 31, 1965
[K. SUBBA RAO, J. C. SHAH AND S'. M. S!KRI, JJ .]
Income-tax Act (11 of 1922)-Sale of going concern-Slump price
B
-When part attributable to stock-in-trade.
a
D
E
F
G
The business of the assessee firm, carrying on land development
business was sold as a going concern to a company· promoted by the
assessee ::; partners. The purchase price included sums for th.e val':1e
of land, goodwill, etc. The amount shown as the valuie of th.e goodWlll
\?as sought to be aseessed to income-tax on the grounds (1) that the
assessee's business was purely one of buying and selling land and (ii)
the amount was profit attributable to the sale of land which was
the stock-in-trade of the assessee. In appeal to this Court.
HELD: On the facts of this case it could not be said that the
£ssessees were carrying on the business of l)Urely buying and selling
land. They were engaged in buying land, developing it and then
selling it. The sale was the sale of the whole concern and no part of
the slump price was attributable to the cost of the land. If that was
so, no part of it was taxoble. [617H-618A, E]
Commissioner of Income-tax, Kerala v. We.st Coast Chemical and
Industries Ltd. 46 IT.R. 135 and Doughty v. Commissioner of Taxes
(1927) A.C. 327, applied.
In the case of a concern carrying on the business of buying land,
developing it a-·! the selLing it, it is easy to distinguish a realisation
sale from an ordinarv sale. and it is verv difficult to attribute part of
the slump price to the cost of land sold in the realisation sale. The
mer~ fact that in the schedule the price of land was stated did not
lead to the conclusion that part of the slump price was necessarily
attributable to the land sold. There was no evidence that any attempt
was made to evaluate the land on the date of sale. As the assessees
\Vere transferring the concern to a company, c0nstituted by the assessees themselves, no effort would ordinarily have been made to
evaluate the land as on the date of sale. r618B-D]
CIVIL APPELLATE JURISDICTION:' Civil Appeal No. 310of1964.
Appeal by special leave from the judgment and order dated
December 13, 1961 of the Calcutta High· Court in Income-tax
Reference No. 7 4 of 1956.
N. D. K arkhanis, Go pal Singh and R. N. Sachthey, for the
appellant.
A. V. Viswanatha Sastri, S. Murthy and B. P. Maheshwari,
for the respondent.
B
The Judgment of the Court was delivered by
Sikri, J.
This is an aopeal by special leave directed against
the jud~ment of the High Court at Calcutta in a reference under
•
611
612
SUPREME COURT REPORTS
[1965] 3 S.C.R,
s. 66 of the Income Tax Act. The four questions referred to the
High Court by the Income Tax Appellate Tribunal are:
"(!) Whether on the facts and circumstances of this case the
Income-tax Officer, Centra:l Circle XIV, Calcutta, was
competent to file the appeal before the Tribunal against
the order of the Appellate Assistant Commissioner of
Income Tax, Range-A, Calcutta?
(2) Whether on the facts and circumstances of this case the
sum of Rs. 2,50,000 represented the surplus on the sale
of lands which was the stock in trade of the assessee
company or was the value of goodwill alleged to have
been transferred?
(3) Whether on the fac.ts and circumstances of this case by
the sale of the whole business concern it could be held.
that there was taxable profit in the sum of Rs. 2,50,000?
(4) Whether on the facts and circumstances of this case
and fo view of the findings of the Tribunal that the
entire share capital of the vendee company (excepting seven ordinalry shares) was taken over by the
vendOF firm in lieu of the sale price of the business
as a whole, there was any profit in the amount of
Rs. 2,50,000 the same being taxable und~r the Indian
Income Tax Act?
The relevant facts and circumstances are these. The respondent, MI s Mugneeram Bangur & Co. (Land Department) Calcutta
(hereinafter referred to as the vendors) were a firm carrying on
the business of land development in Calcutta. By an agreement
dated July 7, 1948, the partners of the firm agreed to sen all
the business of the said firm to the Amalgamated Development
Limited, hereinafter called the vendee, which company was promoted by the partners of the firm. The relevant paragraphs of the
said agreement are as fonows :
"And Whereas the Vendors have agreed to sen and the
company has agreed to purchase an the said business
on the basis hereinafter set out.
Now it is hereby agreed and declared between the parties
as fonows: -
I. The Vendors do )Jereby agree to sen and the company doth hereby agree to purchase All That the said
. business with effect from the eighth day of July
One thousand nine hundred and forty,eight. Togethet with the goodwin of the said business And
all stock ii) trade, fixtures, tools, implements, furniture, fittings and an other articles and things
belonging to the said business or in any way used
in the same including the benefit and advantages
of all contracts.
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C. I. T. V. MUGNEERAM & CO, (Sikri, J.)
613
2. The purchase price shall be Rupees thirtyfour lakhs
nintynine thousand
and three hundred paid and
satisfied by the Company allotting to the Vendors
or their nominees seventeen thousand five hundred
Redeemable Preference shares of Rupees one hundred each and seventeen thousa<nd four hundred and
ninetythree Ordinary shares of Rupees one hundred each in the capital of the Company which will
be accepted by the Vendors in full satisfaction of
the said purchase price.
3. The Company shall undertake and discharge all debts
and liabilities of the Vendors including development
expenses such as opening out roads, laying out
drains and sanitary arrangements providing electricity in the areas and providing a School in Tollygunge for educaJtion of Children for which the
Vendors have given an undertaking to the Tvllygunge Municipality and also the liability of · the
Vendors in respect of the deposits made with them
by various intending purchasers of lands but excluding the liabilities of the Vendors for Income-tax,
Super-tax or any other tax or duty on income or revenue in respect of the profits of the business".
The sum of Rs. 34,99 ,300 was arrived at in the Schedule
thus:
•
1. Land
2. Goodwill
3. Motor Car & Lorries
4. Furniture, Fixture etc.
5. Mortgage secured
6. Deposits for purchase of land
(In rupees)
12,68,628 7 7
2,50,000 0 0
25,866 8 6
5,244 5 6
. . 71,62,367
6 0
53,500 0 0
7. Advance paid to pleaders solicitors, contractors' staff and other
outstandini;s
1,83,622 3 6
8. Cash in Bank
71,800
I
8
36,21,029 0 g
Less liabilities
1,21,729 0 9
34,99,300 0 0
614
SU PKJ!ME CO IJRT REPORTS
[!965) 3 S.CR.
The consideration of ·Rs. 34,99 ,300 was paid by allotment
of 17,500 Redeemable Preference shares of Rs. 100 each and
.17,493 Ordinary shares of Rs. 100 each, the allotm~nt being to
the vendors-partners or their nominees. Thus. the vendors received
shares of the face value of Rs. 34,99 ,300 for the aJSsets transferred
to the company.
The Income Tax Officer held that the sum of Rs. 2,50,000
was actually charged by the vendors as a lump sum amount of
profits on sale of valuable stock in trade and not goodwill as
alleged. The Appellate Assistant Commissioner, on appeal, held
that the said sum of Rs. 2,50,000 was the value of the goodwill.
He further held that .since the transfer was a transfer of business
as a going concern, the profit was the capital gain and therefore
not liable to tax. Relying on Doughty v. Commissioner of
Taxes,(') he held that as "the transfer is a transfer of all assets
of the firm to a company the transfer is a capital sales".
The Income Tax Officer filed an appeal before the Appellate
Tribunal. The Appellate Tribunal held that although the sale
was the sale of a business as a going concern,. the value of the
stock could be traced, and, therefore, the profits arising out of
the sale was taxable income. Regarding the goodwill, the Tribuna.I
observed:
"We do not think. that there was much value of the goodwill of the business that was transferred. Mugneeram
Bangur & Co. was a firm constituting of- several
partners and Mugneeram
Bangur & Co.
Land
Department was a seprurate firm consisting of the
same partners with. however. different shares in the
firm Mugneeram Bangur & Co. were also carrying on
business in lands and buildings along with its activities in other businesses. ·our attention was drawn
by the Department Representative to the fact that in
.. the case of transfer of lands and
buildin~s of the
assessee firm the cm1veyances were as a rule executed
in the name of Mugneeram Bangur & Co.
The
assessee's learned Counsel did not object to this fact.
We are therefore accepting it as· oorrect. If so, there
was nothing in the nalme of Mugneeram Bangur &
Co. Land Department. The conversion of the said firm
into a Company in an entirelv different name would
also indicate that not much of imoortance was
attached to the name of Mugneeram Bangur & Co.
Land Deparln)ent. In the· circumstances, in our
opinion, the orice paid bv
the ourcbase Comoanv
was not on the consideration of the goodwill of the
~) [1927J'A.C. 327.
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e:
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C. I. 1'. V. MUGNEERAM & UO. (f3.ikri, J,)
615
vendors but upon taking over the entire going concern
and paying the consideration not in money but by
allotment of shares. In such circumstances, the surplus was out of the sale of the business as a whole,
including the stock in trade of the assessee firm. Since
the other assets transferred had definite yalue which
would not increase in value by the process of transfer,
the only value that could increase was the value of
the stock in hand, that being the land in the present
case.
In our opinion, therefore, the amount of
Rs. 2,50,000 was really the excess value of the lands
sold along with the other assets".
But the Tribunal dismissed the app~al on the ground that although
the vendors were a different entity from the vendee, the first being
a partnership and the second being a limited company, the
transaction was mere adjustment of the business position of the
pa'tners. It further observed that the Income Tax Department
was not entitled to take mere book-keeping entries as the evidence
of any profit in the matter.
The High Court first answered question No. 4, thus:
"There was no profit in the transaction by which the entire stock in trade and the business of the firm were
transferred to the lirnited company. Again the fact
that two outsiders were brought in as directors with
seven shares allotted to them out of 39 ,300 shares
makes no difference. In Sir Homi Mehta's case 400
shares out of 6,000 shares were allotted to Sir Homi
Mehta's sons. Nor· again cam I see any difference in
principle between the case of conversion of business
into a private limited company and one in which it
is converted into a public limited company if in the
latter company outsiders are not allotted any sizeable
proportion of the shares issued".
The High Court felt that this answer was enough to dispose
of the matter, but as questions 2 and 3 had been referred, they
answered them. Regarding question No. 2, the High Court held
that "as the assets of the firm transferred to the company have
been itemised and as there can be no question of variation of the
figares given in items 3 to 8 in the agreement for sale, it must be
held that Rs. 2,50,000 shown as the value of the goodwill must
be represented by surplus on the sale of lands which was the
stock-in-trade of the assessee company". Regarding question No.
3, the High Court held that even if the value of the stock in trade
taken over by the assessee was greater . than the figure shown
therefor in the i1greement for sale in view of the answer to question 4, there ·,vas no profit which could he taxed.
'(i 'Ii
:o.;1'l'HJ·:~1•: ('Olllt'I' H.g1'1Ht'l'H
I I 9fi!i l !l s.c.a.
We may mention that it is not necessary to deal with question
A
No. I because it was given up before the High Court. Mr.
Karkhanis. learned counsel for the appellant. urges that the
Doughty's case(') was wrongly decided in one respect and that
the vendors and the vendee being different entities. it is not
permissible to tear the corporate veil to see whether the partners
of th~· vendors were the same persons as the shareholders of the
vendee. He says that if the veil is not torn, then there was a sale
by the vendors to the vendee and profits arose out of the sale.
Learned counsel for the respondent, Mr. Viswanatha Sastri, says
that if the third question is answered in his favour. it would not
be necessary to deal with the other questions. As we are inclined
to answer the third question in the favour of the vendors, it is
not necessary to deal with the other questions and the arguments
addressed in respect of them.
The Appellate Tribunal held in this case that the sale .was
a sale of business as a going concern. This is also apparent from
clause 1 of the agreement set out above. If this is so Doughty's
case(') <jpplies. The facts in Doughty's case may be conveniently
taken from the headnote in that case. "In 1920, two partners
carrying Off business in New Zealand as general merchants and
drapers sold the partnership business to a limited company in
which they beca,me the only shareholders. The sale was of the
entire assets, including goodwill, the consideration being fully
paid shares, and an agreement by the company to discharge all
the liabilities. The. nominal value of the shares being more than
the sum to the credit of the capital a1ccouni of the partnership,
in its last balance sheet. a new balance sheet was prepared showing a larger value for the stock in trade. The Commissioner of
Taxes treated the increase in value so shown as a profit on the
sale of the stock in trade, and assessed the appellant upon it for
income ·tax under the Land and Inoome Tix Act, 1916, of New
Zealand, which imposes the tax on all .profits or gains derived
from any business"
The Privy Council decided the case in favour of the appellant on two grou.nds, the first being that "if the transaction is
to be treated as a sale, there was no separate sale of the stock,
and no valuation of the stock as an item forming part of the
aggregate wh.ich was sold". In connection with this ground, Lord
Phillimore observed that "income-tax being a tax upon income,
it is well established that the sale of a whole concern which cal'l
be shown to be a sale at a profit as compared with the price
given for the business, or at which it stands in the books does
not give rise to a profit taxable to income-tax". He further observed that "where, however, the business consists, as in the
present case, entirely in buying and selling, it is more difficult to
distinguish between an ordinary and a realization sale, the
(') (1927] A.O. 327.
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c.' I. T. v. MUGNEERAM & co. (Sikri, J.)
617
object in either case being to dispose of goods at a higher price
than that given for them, and thus to make a ·profit out of the
business. The fact that large blocks of stock are sold does not
render the profit obtained anything different in kind from the
profit obtained by a series of gradual and smaller sales.
This
might even be the case if the whole stock waJS sold out in one
sale. Even in the case of a realization sale, if there were an item
which could be traced as representing the stock sold, the profit
obtainej by that sale, though made in conjunction with a sale
of the whole concern, might conceivably be treated .a:s taxable
income". Lord Phillimore concluded with the following observations:
"If a business be one of purely buying and selling,
like the present, a profit made by the sale of the whole
of the stock, if it stood by itself, might· well be assess'
ab1e to incoinc tax; but their view of the facts (if it be
open to them to· consider the facts) is the same as that
of Stout C.J.-that is, that this was a slump transaction''.
This Court, in Commissioner of Income-tax, Kerala v. West
Coast Chemicals and Industries Ltd.(') understood the Doughty's
case(') thus:
"This case shows that where a slump price is paid and
no portion is attributable to the stock-in-trade, it may
not be possible to hold that there is a profit other than
what results from the appreciation of capital. The essence
of the matter, however, is not that an extra amount has
been gained by the selling out or the exchange but
whether it can fairly be said that there was a trading
from which alone profits can arise in business".
It follows from the above that once it is accepted that there was
a slump transaction in this case, i.e. that the business was· sold
as a. ping concern, the only question that remains is whether any
portion of the slump price is attributable to the stock in trade
The learned counsel for the appellant relies on two grounds
to support the contention that there is profit attributable to the
s·o1Ie of land which was stock-in-trade of the vendors. He says first
that in the schedule to the agreement the value of hmd and the
value of goodwill and other items is specified. He says that
altho~gh the amount of Rs. 2,50.000 was shown as price of goodw11l, 1t .was really excess value of the land sold along with other
assets. Secondly. he says, relying on the passage already cited
above from Daughty's case(') that the vendors' l:iusiness was a
business of purely buying and selling land. In our opinion, on
the facts of this case it cannot be said that the vendors were
carrying on the business of purely buying and selling land. In
(') 46 I.T.R. 135.
(') [1927] A.C. 327.
618
SUPREMB COURT REMRTS
[1965] 3 s.a.a.
this case the vendors were engaged in buying land, developing it
and then selling it. The agreement itself shows that the venaors
had already i:lcurred debts and liabilities for development expenses such as opening out roads, laying out drains and sanitary
arrangements, providing electricity and providing for a school.
It seems to us that in the case of a concern carrying on the
business of buying land, developing it and then selling it, it is
easy to distinguish a realisation sale from an ordinary sale, and
it is very difficult to attribute part of the slump price to the cost
of land sold in the realisation sale. The mere fact that in the schedule the price of land is stated does not lead to the conclusion that
part of the slump price is necessarily attributable to the land sold.
There is no evidence that any attem.Pt was made to evaluate the
· land on the date of sale. As the vendors were transferring the
concern to a comp~ny, constituted by the vendors themselves, no
effort would ordinarily have been made to evaluate the land as
on the date of sale. What was put in the schedule was the cost
price, as it stood in the books of the vendors. Even if the sum
of Rs. 2,50,000. attributed to goodwill is added to the cost of
land, it is nobody's case that this represented the market value
,of the land.
In our view the sale was the sale of the whole concern and
no part of the slump price is attributable to the cost of land.
If this is so, .it is clear from the decision of tpis Court in Commissioner of Income-tax, Kera/a v. West Coast Chemicals and
In~us11:ies Ltd.(') and Doughty's case(') that no part of the slump
pnce 1s taxable. We, therefore, answer question No. 3 in the
negative. As stated before, in view of this answer, it is not neces-'
sary to a1.1Swer questions Nos. 2 and 4.
The appeal is accordingly dismis~ed with costs.
(') 46 I.T.R. 135.
(') (1927) A.C. 327.
Appeal dismissed.
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