# Mah1raj Joeat Bahadur Smgti v. Badri Pratad Stth

- **Citation:** [1962] Supp. 3 S.C.R. 960
- **Court:** Supreme Court of India
- **Decided:** 1960-01-27
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/mah1raj-joeat-bahadur-smgti-v-badri-pratad-stth-2523
- **Pages:** 14

## Headnote

1962
Mah1raj Joeat
Bahadur Smgti
v.
Badri Pratad Stth
Dos J.
A1arch :?0,
960 SUPREME COURT REPORTS [1962] SllPl'.
to that testimony, the lcarne<l District Judge
rightly came to the conclusion that cl. (iii) of s.1.1(:!)
(a) of the Act was not attracted to the Catie.
For these rea.sons we have com!i to the conclusion that there is no merit in the appeal whi~h
i~ accordingly dismissed with costs.
AppP,al dismissed.
K. M. S. REDDY, CO:\fi\HSST01\ER OF INCOME.
TAX, KERALA (CODIBATORE), EHNAKl1LA.Jl
r.
THE WEST COAST CHEMICALS AND JN"DUSTIUES LTD. (I!\ LIQCIDATION"), ALLEPPX
(S. JC DAS, :VT. HrnAYATULLAH and .J.C. SHAH, .TJ.)
lncomr Tax-lri11dirig up of bu.sine . .;s-Rra[isation of
r1ssf:fs-~)'afe rlurin(f loinding up, if an l'lt;,t of lradi'tl'}-l'rofits
an'si1;q out of sale--Lial1ili1y to lox.
The respondent cornpany \\·as
incorportrd
in
1937
primarily with the object of acqnirini:r and \\·orking- a match
factorv.
Under the 1nr.morandun1 of as-;oc:iation the company
\\·as a·tso empo\\'Cred, inter a/ia, to rnanufacture and deal in
chemicals. The business of rnanufa.cturing 1natches \\':lS carri<~rl
on hy the company till 1941.
Thercaf1cr thr. prr.•fits hccame
less and less due to y,:ar conditions.
On
~1a.y 9, 19-lJ, the
company rntere:d into an agreement with a third party for th~
sale of the land-.. buildings. plant ancl machinery of it~ match
factory for Rs . .i,75,000.
It ,vas agreed that this price \\'oulci
not include manufacturrd roods, cttn1irab ancl
CJtb<r 1a,,·
1naterials or any other asset not shown in the agrc~ment of
~le. J.ater, a fresh a~TTce1n~nt ,..,as entered into on .J\11g11.-.t 9,
19-13, under which the sale includeci chernical~ and paper for
rnanufacture \vhich had not hecn sold in the first instance an<l
the price \\'as Rs. 7,'.~5.000.
In a report to thr. sharcholdc:rs
dated ..-\ugust l, 1944, the Direc.tof!C stated t!1at the price
obtained had shown a capita) appreciation of about six tinH:>s
the cost price and that the sale of chemicals harl resulle<l in
substantial profit.
In proceedings for assessing income which
had escaped a'isessment
the income·tax authorities, relying
upon the memorandum of association \\"hic:h allowed the
\
•
-
::!S.C.R.
SUPREME COURT REPORTS
961
colnpany to manufacture and sell chemicals and on the
Directors' report, held that the profit from the sale of the
chemicals and other raw materials was liable to income-tax on
a
profit of Rs. 2,00,000
which wu reduced later to
Rs. !, 15,259.
The company claimed that the stock of raw
materials was sold not ·in the course of ordinary trading but
only in a realisation sale after th~ company had qeen wound
up. The evidence showed that the clause in the memorandum
of association giving power to the company to sell chemicals
was seldem used and that prior to the sale of chemicals to the
purchaser, two. transactions of sale of chemicals for small
alnonnts in 1943 were too petty in
themselves
to afford
e~i<lence of trading in chemicals.
•
Held, that though under the second agreement dated
August 9, 1943, more price was paid, the transaction was still
a winding up sale and no part of this slump price was identifiahle as the price of the chemicals and other raw materials .
There was
no eVidence. that before the winding 1up the
company had sold chemicals as part of its business, and the
two instances cited were too petty in them:5elves to afford
evidence of a continued or sustained trading in chemicals.
A winding up salf" is not "trading or doing business" and the
sale of the raw materials including the chemicals was not part
of any busine!';s done.
Accordingly, the sum of Rs. 1, 15,259 was not liable to tax.
.
Dou.ghly v
Commi8sioner of Taxes, (1927) A. C. 327,
discussed and relied on.
Case Jaw revie\ved.
CrvrL APPELLATE .JURISDICTION: Civil Appeal
No. 286 of 1961.
Appeal from the judgment and order dated
January 27, 1960, of the Kerala High Court in
I. T. R. Case No. 14 of 1955.
·
K. N. Ra,iar;opal Sastri and D. Gupta, for the
Appellant.
S. T. De.sai

## Text

1962
Mah1raj Joeat
Bahadur Smgti
v.
Badri Pratad Stth
Dos J.
A1arch :?0,
960 SUPREME COURT REPORTS [1962] SllPl'.
to that testimony, the lcarne<l District Judge
rightly came to the conclusion that cl. (iii) of s.1.1(:!)
(a) of the Act was not attracted to the Catie.
For these rea.sons we have com!i to the conclusion that there is no merit in the appeal whi~h
i~ accordingly dismissed with costs.
AppP,al dismissed.
K. M. S. REDDY, CO:\fi\HSST01\ER OF INCOME.
TAX, KERALA (CODIBATORE), EHNAKl1LA.Jl
r.
THE WEST COAST CHEMICALS AND JN"DUSTIUES LTD. (I!\ LIQCIDATION"), ALLEPPX
(S. JC DAS, :VT. HrnAYATULLAH and .J.C. SHAH, .TJ.)
lncomr Tax-lri11dirig up of bu.sine . .;s-Rra[isation of
r1ssf:fs-~)'afe rlurin(f loinding up, if an l'lt;,t of lradi'tl'}-l'rofits
an'si1;q out of sale--Lial1ili1y to lox.
The respondent cornpany \\·as
incorportrd
in
1937
primarily with the object of acqnirini:r and \\·orking- a match
factorv.
Under the 1nr.morandun1 of as-;oc:iation the company
\\·as a·tso empo\\'Cred, inter a/ia, to rnanufacture and deal in
chemicals. The business of rnanufa.cturing 1natches \\':lS carri<~rl
on hy the company till 1941.
Thercaf1cr thr. prr.•fits hccame
less and less due to y,:ar conditions.
On
~1a.y 9, 19-lJ, the
company rntere:d into an agreement with a third party for th~
sale of the land-.. buildings. plant ancl machinery of it~ match
factory for Rs . .i,75,000.
It ,vas agreed that this price \\'oulci
not include manufacturrd roods, cttn1irab ancl
CJtb<r 1a,,·
1naterials or any other asset not shown in the agrc~ment of
~le. J.ater, a fresh a~TTce1n~nt ,..,as entered into on .J\11g11.-.t 9,
19-13, under which the sale includeci chernical~ and paper for
rnanufacture \vhich had not hecn sold in the first instance an<l
the price \\'as Rs. 7,'.~5.000.
In a report to thr. sharcholdc:rs
dated ..-\ugust l, 1944, the Direc.tof!C stated t!1at the price
obtained had shown a capita) appreciation of about six tinH:>s
the cost price and that the sale of chemicals harl resulle<l in
substantial profit.
In proceedings for assessing income which
had escaped a'isessment
the income·tax authorities, relying
upon the memorandum of association \\"hic:h allowed the
\
•
-
::!S.C.R.
SUPREME COURT REPORTS
961
colnpany to manufacture and sell chemicals and on the
Directors' report, held that the profit from the sale of the
chemicals and other raw materials was liable to income-tax on
a
profit of Rs. 2,00,000
which wu reduced later to
Rs. !, 15,259.
The company claimed that the stock of raw
materials was sold not ·in the course of ordinary trading but
only in a realisation sale after th~ company had qeen wound
up. The evidence showed that the clause in the memorandum
of association giving power to the company to sell chemicals
was seldem used and that prior to the sale of chemicals to the
purchaser, two. transactions of sale of chemicals for small
alnonnts in 1943 were too petty in
themselves
to afford
e~i<lence of trading in chemicals.
•
Held, that though under the second agreement dated
August 9, 1943, more price was paid, the transaction was still
a winding up sale and no part of this slump price was identifiahle as the price of the chemicals and other raw materials .
There was
no eVidence. that before the winding 1up the
company had sold chemicals as part of its business, and the
two instances cited were too petty in them:5elves to afford
evidence of a continued or sustained trading in chemicals.
A winding up salf" is not "trading or doing business" and the
sale of the raw materials including the chemicals was not part
of any busine!';s done.
Accordingly, the sum of Rs. 1, 15,259 was not liable to tax.
.
Dou.ghly v
Commi8sioner of Taxes, (1927) A. C. 327,
discussed and relied on.
Case Jaw revie\ved.
CrvrL APPELLATE .JURISDICTION: Civil Appeal
No. 286 of 1961.
Appeal from the judgment and order dated
January 27, 1960, of the Kerala High Court in
I. T. R. Case No. 14 of 1955.
·
K. N. Ra,iar;opal Sastri and D. Gupta, for the
Appellant.
S. T. De.sai, J. B. Dadachan,ii, 0. o: Math1~r
and Ravinder Narain, for the respondent.
1962. March 20. The Judgment of the Court
was delivered by
'1962
K.M S, Reddy,
Commiss•
00"1er of
lncomt·tax, Ktraf
v.
Tht West Coas'
Chemieals an~'
Industries I.Id_
HrnAYATULLAH, J.- In this a1 peal 1 y the
HidayatullahJ,
('< nwiF8icr.rr d hcc n.e·tn:. Kernle, filcd with
ICM.s. lltdd1"
Cornmis.siontr ~1/
Inccmt-loY, Kt,ala
v.
'l'lit IVtsJ Cc"-''
Cl.nnicols 0111/
lnd1otri1s l.td.
llida!1Dft1lioh J,
9G2
SUPREME COURT REPORT~[l962] SUPP,
certificate cf the High Court of Kcrala, an impor.
tant question vf law was raised be fort> the High
Court, which was answered against the Dcparment.
It arose in the following circumstances. The res.
pon<lent, the West Coast'Chcmicals and Industries,
Ltd. (referi<>d to as the asscssce Company) was
incorporated in rn:n primarily with the object of
acquiring and working the rights, title and interest
in a match factory belonging to one A. Y. Thomas
at :IIu<l ical. The J[emcrandum of Associatic·n of
the asses;;ee
Company, however, empower<'d the
Comp;iny to manufacture and deal in acidR, alkalis
and other
chemicals.
The assessec Company
carrie1l on itH bm.incss ofma1Jufact.uring matelws
till the account year ending on April 30, I 941.
Ther<'after, the profits fr<•m the business became
less and less due to \Var conditions, and the asses.
see Company began to ma1mfactnre plywood chests
for k:i, paints and lt-mongra~s oil.
These were
contemplated by cl. \3) of the Memorandum of
A8weiation.
On 111ay, 9, 1943, the
aSSeEsee Company
entered into an agreement with one Hao Sahib
Natesa Iyer for the sale of tho lands, buildings,
plant and machinery of its
match factory for
Rs. 5, 75,000. It was agreed that the price would
not include manufactured
good~, chemicals and
other raw materials or anv ot"her asset uot shown
in the agreement of sile. The purchasp,r was
allowed sixty days for the payment of the balance
of the price, H.s. 57,500 having been already paid
at the time the agreement was entered into. The
purchaser made a default in payment, and on
August !l, 1943, a fresh agreement was cnkrcd
into by the parties, this time for a consideration
of Re. 7,35,000, and the sale included cbt mica.Is
and paper for manufacture whkh had not been sold
in the first
i11stance.
In a eonfidentiid repmt
made on August I, 19'11, to the shareholders, the
•
-
3S.C.R.
SUPREME COURT REPORTS
963
Directors statrd that the price obtained had shown
a capital appreciation of about six timfs the cost
price, and the sale of chemicals had also resulted
in a substantial profit.
Meanwhile, the assessment of the Company
fur the account year ending April 30, 1944, had
been completed by the Deputy Commissioner of
Income-tax, and the assessee Company had been
assessed
on an income of Rs. 36,498-6 4. The
Deputy Commissioner of Income-tax then issued
a notice under s. 25 of the Travancore Incom,tax
Act to the Company's Liquidator on the ground
that the profits from the sale of the chemicals and
p>iper for manufacture had escapecl assessment.
The Official Liquidator took up the position that
the match manufacturing had been stopped, and
that businPsS had been wound up, and there was
thus only an appreciation of the capital assets and
not a busine:is profit, which was liabie to assessment. The Deputy Commissioner,· however, relying upon thA Memorandum of Association, which
allowed the asses8ee Company to manufacture and
sell chell)icals, and on the Directors' report, held
that the assessee Company was liable to incometax on a profit of Rs. 2 lakhs arising from this sale.
The Commissioner of Income-tax on appeal, however, reduced the assessable profits to Rs. 1,15,25\1.
Before the Gommissioner, the Liciuidator admitted
that the profit from the sale of the chemicals was
Rs. I, 15,259.
An appeal was then filed before the Incometax Appellate Tribunal at Trivandrum, and the
assessee Company contented that a stock-in-trade
could only be that which was the subject of trade,
and that the stock of raw materials was not sold
in the oourse of ordinary trading but in a reali-
-1
sation sale after the Company had been wound up.
The Tribunal found that the business had not
J9'i2
K .iVf.R. Re<ldy,
Commissioner of
Income-tax, Kera/a
v.
The West Coajt
Chemicals and,
Industries Ltd.
ifld~~atul!ah .J, ·
1962
K .. '>f.S. Rtddy,
Commissioner of
lncomr;-~ x, Kerola
•.
TM West Coa1t
Chemi.ais and
/11d11llrir.J l.td.
H;dayat,~llah .1.
964
SUPRE~IB COURT REPORTS [1962) SUPP.
completcl,v cea~ed to exist, since the assessee Company was carrying on manufacturing on behalf of
the purchaser, 11nd the sale could not be regarded
ns a reali~ation sale after the Company was wound
up, but had the characteristics of a trading sale.
At the request of th<.> asRessee Company, however,
the Tribunal referred two questions to the High
Court for its deciAion, and they were:
-
"( 1) whPther the transaction of s:ile of
the rnw materials along with the business,
•
incluciing machinery, plant and premises is a
revenue sale, and whethrr in the facts and
circumstances
of t.ht'
casn,
the Rum of
ns. I, I .~.25!1
ha.s lJ.,en rightly charger! to
in~ome.tax; and
(2) whether the decision that the sale of
match, machinery and premises, was distinct
from the sale of chemicals iR legally warranted and whether there was legally a single
transaction of the entire match
factory
inclusive of raw mawrials~"
It may be pointed out that prior to the sale of
chemicals to the purchaser, the only evidence of
sale of chPmicals by the ass~ssec Company was of
two transactions .. In the first transaction, there
was a sale of chemicals on .Tuly 24, l!J4a, to an
educational institution for Rs. 50 and another sah,
on October 30, l!J43, to a stranger for Rs. 7-12·0 .
. The High Court held that by th1> sale no business
was done, and that. the amount obtainNI was only
hy way of realisation sa.l<>, and was not, therefore,
liable to tax.
The argument of the Department (also raised
hefore the High Court) proceeds in this way.
The
Department reforn to the llfrmorandum of
Association under which the assessee Company was
to carry on
the h1rnines~ of manufacturing and
3 S.C.R.
SUPREME COURT REPORTS
965
selling chemicals, that in the past it had sold chemicals, that in the first sale of its assets it had ex-
. eluded chemicals and some other raw materials
necessary for the manufacture of matches and had
sold the concern for a lesser price, that later it
included chemicals and raw materials and obtained
a larger price, "and that admittedly there was an
identifiable profit of Rs. l, 15,259
on the sale
of the chemcials and raw materials.
The Department, therefore, contends that the amount of
Rs. l,15,259 was properly brought to tax as a trading profit. The question, therefore, is whether
there can be said to be a· sale in the carrying on
of the business in respect of the chemicals and
other raw materials. This qu~stion is not one easy
to decide, specially with the assistance of rulings,
in which the facts were different. There is a
great danger of extracting a
principle· from
the
reported cases, divorced
from
the
facts.
In Halsbury's Laws of 1£ngland,
3rd
Edn.,
Vol.
20, pp. 115-117, there is a list in the
footnotes of the cases which have been decided on
one side or the other of the dividing line. In the
text, the law, as summarised from the cases, is stated
as follows :-
"210. Mere realisation of assets is not
trading; but the completion of outstanding
contracts after the dissolution of a firm, the
commencement of liquidation of a company,
or the winding up of the affairs of a trader,
has been held to be trading ..... .
21 l. .. The cases illustrating the question
arising in such circumstances can be divided
.into two categories, first, those where the sales
formed part of trading activities, and, second,
those where the realisation was not an act of
trading".
This distinction, in our opinion, is a sound one. The
only difficulty is in deciding whether a particular
1962
K.M .S. lleddy,
Commin:onrr of.
Income-tax, Kerala
v.
The West Co.it
Chemicals and
Industries Ltd.
Hida_yafollah J.
J9G2
K JJ .S. lidd7,
Comtnissicmtr of
[11coma-tax, Ktra(a
v.
Tht H't.sf Coajt
Clum icalJ a11d
lndu1tri1s l..Jtl,
Hida71ttdi.h J,
966 SUPREME COURT REPORTS (1962) SUPP.
ca.se belong• to one category or the other.
In this,
much support cannot be derived from ol>scrvations
made by learned ,Judges pertaining to the factH of
a case, but they do guide one in a true appraisement of tho case in hand.
In the well-knuwn case of Californiun Cuppu
Syndicate v. Harri,, (1), the difference betwceu the
purchase price and the value of the shares for which
the property was cxch inged was considered as profiL
assessable to income-tax. Thern, the company was
formed for the purpose of acquiring and rt'Helling
mining properties, and though what it had acquired
had all been sold or exchanged, the transaction was
considerod a l>usiness transaction falliug within the
avowed objects, of the ·company. The case has l>ecu
accepted as decided on these uarrow facts, in
'l'ebraii (Johore) Jiubber Syndicate Ltd. v. Funner ('),
in which a different conclusion· was reached o:i
slightly different facts.
There also, the Company
was· formed with tho objoct of acquiring rubl>er
estates a.nd for developing them. Under the Memorandum, the Company had the power to sell its
properties.
Two properties having l>ccn acquin·d
aud the funds having run out, they were sold but at
a profit.
This profit was considered as an appreciation of capital and uot as assessable profit.
The
differonee botween these two cases is that whereas
in the formor, though the whole of the prope1 ty was
sold, it was sold as a part of trading, in the letter,
the property was sold not as part ot trading out on
a winding up sale.
The Department relics upon Californian Copper
Sy1uiicate v. Harris ('), while the assessee Compauy
relies upon 1'ebrau (Julwre) Rubber Syndiwte Ltd. v.
Parmer ('). These caseH were also considered and
applied by the Privy
C~uneil in. Doughty ,.,
Commissioner of Taxes('), which 1s relied upon l>y .
(I) [190·1] S T.C. 159.
:2) [ 1910] S T.C. 658.
(3) [1927] A.G. 327.
•
-
3 S.C.R •
SUPl~EME COURT REPORTS
967
both sides, in view of certain observations of the
Pl'ivy Council, tu which we shall presently refer. In
that case, th~re were two partners carryin,g on busi·
ness in New Zealand .as general merchants. They
sold the partnership to a limited company, of which
they were the only shareholders. The sale was of
the entire assels including the good will, and the
price was payable in the shape of fully paid shares
in the new company.
The nominal value of the
shares was more then the capital account as shown
in the last balance sheet, and the partners 'prepared
a new balance sheet in which a larger value was
placed upon the stock-in-trade. The Income-tax authorities in New Zealand treated the difference between
the value placed on the stock-in-trade in the old
balance sheet and that placed in the new balance
sheet as a profit liable to tax. The Privy Council held
that this was wrong, pointing out that for profit to
arise, there must be a trading, and that a mere alteration of a book-keeping entry was not evidence that
there was profit. It also held that the sale was of
the entire assets, and that the price represented a
payment for the entire business without a separate
sale or valuation of this stock-in· trade for purposes
of sale. It referred to two cases decided respectively by the Supreme Court of New Zealand and the
High Court of Australia, in which sales by pastora·
lists of their flock of sheep had taken place. In the
New Zealand case, the excess obtained over the
book value was treated as assessaMe profit, but in .
the Australian case, it was not. Bot,h the sales were
of the entire stock. The Privy Council approved
of the Austra.!ian case, and though it . did not ex·
pressly dissent from the New Zealand case, it indicated that it found it difficult to appreciate the
decision. These two cases from New Zealand and
Australia were, of oourse, relied upon by the rival
parties before us, and we shall consider them.
1962
K.Jf .S. Reddy,
Commissioner 'f
lncome .. tax1 Kira/a
v.
The WtSt Coas1
Chemicals and
Industries Ltd.
Hida~atullah J,
K.M S. R,JJr,
C-0'11f11issi-OntT of
Income-tax, Kera/a
v.
1·hr 1VeJt Co1;1
ChernUal and
l11d1otrie1 Ltd,
lli""oyatul/ah J.
968 SUPREME COURT REPORTS [1962] SUPP.
The Australian case is Commissio-11er of 'l'a:i.ntion (W. A.) v. Newman (1).
A persn11 who carried
on business in WPst.ern Australia as a pastoralist
sold his propctry including all live.stock and plant,
·as a going <'Oncern.
The Commissioner of Taxation
for the State apportioned the purchn.~e money in
respect of the livc·stoek, and assessed the n.mount
which was "received in excess, as income derived
from carryir,g on a business. The High Court held
that the transaction was not during tho carrying on
of the business or even for the purpose of carrying
on the business, but was for the purpose of putting
an end to the business, and that thus the exccsB
represented a capitid appreciation and nut a trading
profit.
The Now Zealand case is Anson v. Co1mni;;sioner
of 'l'cixes ('). Ia that ca.Ile also, a sheep farmer sold
his entire stock of Hheep.
He had the practice of
plaoing on his sheep at the begi11ning and cud uf each
year an arbitrary value without referenco to the
actual market value. When he sold his entire stock,
a nominal profit of i 5,000 ud<l appeared, and ho
was assessed on it. Tho Supreme Court held that
i_t .wa8 not an accretion to t'apital but a pr"tlt uu
the sale of the appellant's 8tock-in-tra<lc.
::iir John
:Salmond, who delivered the judgment of Court,
observed that the holding of a sheep farmer waA not
a capital holding, but his sheep represented a stuckin-trade, and since every appreciation of a stock-intrade represented a profit assessable to income-tax,
it mattered not that the stock-in-trade was sold at
once or from time to time, Of this case, the Privy
Counoil in Daw.;hty's case C) <lid not say mucl1, but
enough to cast a doubt upon it.
This iH what the
Privy Council said at p. 3:l5.
"It would he difficult to arrive at tho
profit in this way if it were the case uf a
(l) [1921] 29 C.L.R 484.
(2)
[1922'. N.7.L.R. 330.
(3) [192i] A. C. 327.
'
•
-
l
3 S.C.R.
SUPREME COURT REPORTS
969
farmer in England; bnt the trade of a pastoraJist is one with which the New Zealand Courts
would be familiar, and which it would be
more easy for the New Zealand Judges than
for their Lordships to appreciate."
The Privy Council made a distinction between a sale
of the entire stock as a part of trading and a sale
of the same stock, as a winding up sale. It observed that if the business be one of purely buying and
selling, "a profit made by the sale of the whole of
the stock, if it stood by itself, might.well be assessable to income-tax". It observed that in Doughty's
case (1) the sale was a slump transaction, and was a
winding up of the business rather than a trading.
The Privy Council further pointed out that there is
a difficulty in decidiug cases of a business, which
involve breeding of sheep for the purpose of selling
wool.
This is quite tme, because the sheep may be
regarded as the capital, with which the wool, which
is sold, is produced, or the sh3ep with the wool on
them may be regarded as the stock-in-trade. Such,
a question, fortunately, does not arise in the present
case, which can be decided onthe narrow ground
whether the business wa; being wound up and the
sale, a realisation sale, or whether trading was going
on in spite of the winding up, so as to attraut tax on
profits made.
Before we answer this question in relation to
the facts of this case, we wish to refer to a few more
cases, which were cited before us. In J. & R. O'Kane
& Go. v. 1'he Commissioners of Inland Revenue (
2),
tbe appellants carried on business as wine and spirit
merchants.
They then wished to retire from the
business and sent a circular letter to their customers.
During the year, they sold their whole stock to
diverse customers, and the question was whether they
were still carrying on their trade during that period,
and whether the profits were thus made in the
(1)
(1927] A.C. 327.
(2) (1922] 12 T.C. 303.
1962
K.M .8 - Reddy,
Commissioner of
lncome~tax, Kera/a
v.
The Wes I Coast
Ch1micals and
lnduJtrics Ltd,
Hidayalullah J.
136?
1:.M .>. 11,dJy,
Commisdor.tr nf
,r,co11tr•:ax, hr•ala
v.
Jiu lfrs! Co:ut
Chemicals ar.d
J11duJ11irJ Lid.
070 SUPRE~fE COURT REP0l{T5 (1962] SUPP.
onJinary course of trade. It was held by the King's
Bench Division of the High Court of Justice in
Ireland that the sales were not in the ordinarv
couf'se of trad~ but wore part of the realisation ,;f
the trading stock and winding up of the business,
and thus not liable to tax. The Court of AppC'al
in
Ireland unanimously re,·ersed the decision
of the High Court.
Honan,
L. J.,
pointed
out that
though the
taxpayer
had
retired
from busirress and had decided not to pu rchaso
any more stock,. he was still carrying on the busi11css of trading in wines and spirits till his existing
stocko were exhamted, and, therefore, the excess
obtained by him represented profit. On appeal to
the Houso of Lorcfs, it was held that there was
e\'idonco 011 which the Commissioners could arrive
at their finding that trading was, in fact, being
carri<'d on.
Lord Buckmaster, speaki11g of the
fads in that case, observed as follows :
"For in truth it is quite plain· that right
up to the end of 1\1 Ii thry were engaged in
tradi11g which, so far as the cxtemal world is
concerned, was the ordinary method of carrying on trade modified 011ly by arrangements
which were merely part of the rnaohinory of
businPss dealing adopted to <'ffect their intention to retire. It m&y well be accepted that
they die! so intend ; yet the intention of a
man cannot be considered ·as determining
11hat it is that his acts amount to; and the
real thing that has to be decided !1ere is what
were the acts that were done m counect1on
with this business and whether they amount
to a trading· which woulcl cause the profits
that accrued to be profits arising from a trade
or busine?~ ?"
The ca,;e was, Lhcrcforc, decided on the finding
of the special Commissioners, for which there was
enough material in o·ddcnco. Similarly, tho case
-
•
3 S.C.R.
SU,PREME COURT REPORTS
971
of The Commissioner of Inland Heveniw y. "Old
BelShni!ls"· Distillery Co., Ltd. (in Liquid-ztion) (l)
was one decided on a finding, in support of which
there wa~ evidence.
The two cases relied upon by
the Dapartment afld the assessee Company respec:
tively do not shed any light upon the problem before us,
because the central decision in both of
them was whether the Commissioners' finding was
justified or not.
In J. and M. Craig (Kilm1~rnock), Ltd. v. Cowperthwaite (' ), the question was how the opening
stock s!:wuld have been valued, and whether any
profit could be said to have resulted. The Privy
Council in IJoughty's case (") remarked about this
case as follows :
"There, on a transference from one company to another, one-third of the value of each
item, other than stock in trade, as it stood in
the books of the selling company, was treated
as its value for
transfer purpose, and the
balance of a slump price, which, with an under.
taking to discharge JiabUities, formed the
consideration, was infernntialJ v attributable
to the stock. It was held, h~wever, in that
case that no sum could bu pitched upon as
the actual price of the stock, and no claim to
assess a profit could be based upon such a
foundation."
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 bold 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
tli (l926J lZ T.c. uis.
c2J
(l9l4J 13 r.c. 617.
(3)
(1927) A.C, 327.
1962
K.M .S. Reddy,
Commissfoner (If
lncoriie·tax, Kcrala
v.
The JVest Coasi
Ch~micals and
Industries Ltd.
Hidayatull ,/i J.
K .. \1 S. Ucdd-''•
Cummi.niomr of
lnc'.m'·tax. Kuala
v
Thr IV, .<l Ciast
(;/i,·micofs and
lwlwtriu Ltd,
/lld1;·111r1//oh J.
!Ji:! SUPREME COURT REPORTS [1962] SUPP.
be Eaid that there \\·as a trading from whirh alone
prQfit1< can arise in business. If this test is a pp lied
to tho present case, th1·n the true answer would be
the one given by the High Court in the judgment
unckr appeal.
There is no doubt., in this cam, that the
asscsooe Company was wound up at lea~t in so far
as it" match manufacture was concerned. That
the business of the Company was sold as a going
concern, and was, in fact, worked by the assessee
Company on behalf of the buyer till the entire
consideration was p>.id, makes no difference, because
the <Lgrecment clearly indicated that the assessce
Company was keeping the factory going, not on
its own behalf but entirely on behalf of the buyer.
One cannot fairlv sav, therefore, that a sale of the
eherniculs and ra~ llla
0
terials for match manufacture
was anything more than a winding up sale, not
with iL view to trading in chemicals and raw mat.crial but to close clown th<' busine~s and to reali~o
the asset~. There was, in fact, no identifiable price
for the chemicals and raw material~ except by
comparing the two prices offered to be paid by
tho buyer, that is to s<iy, the price without tho
chemicals and raw materials and the price with
them.
Prom that alone, however. it is impossible
to infer that the chemicals and raw materials were
sold in the 01 dinary way of business or that the
assessee Company was carrying on a trading business.
The fact th[,t the clause in the Memorandum
gave power to the Company to sell chemicals cauuot be used in this connection, because the eviclenco
clearly 8hows that that clause wa.i never used and
the two sales of chemicals through the years were
too potty in themselv•'s to afford evidenco of a
continued ur s:htaincd trading in chemicals. In
our judgment, this was a winding up RBle with a
view to realising the capital assets of the assesseo
>
!
•
3 S.C.R.
SUPREME COUH.T REPOH.TS
973
Company and not a sale in the course of business
operations, which alone would had attracted t.ax, if
profit resulted.
In the result, the appeiil fail.-i, ancl is dismissed with costs.
·
Appeal dismi8sed.
MADANLAL FAKfRCHAND DUDHEDIYA
v.
SHREITI CHANGDEO SUGAR MILLS L'l'D.
(P. B. GAJENDRAGADKAR, A. K. SARKAR and
K. N. WANCHOO JJ.)
Company-Agreement to
pa11 c1Jmmission
beyond
specified
limi'.t-Validity-Oompa.nie8
(1qf1950), 8, 76(1) & (2).
from profit.o
Act,
.Wi6
There was an agreement between the respondent com~
pany, which was incorporated as a Private Limited Company
in 1939, and its promoters, the appeilant and the rest l)f the
respondent~, that in consideration of the promoters having
each purchased sharers worth 1-1 /2 lakhs of the company, the
company would pay them 12-l/2% of the net profits every yoar.
That agreement was put in art. 3 of the ArticJes of Association
of the company.
In 1941
there was a second agreement
between the company, its promoters and a firm, and by it
the said firm was appointed as the managing agent of the
company and the commission payable to the promoters \vas
reduced to 6-1 /4% and art 3 amended accordingly. There was
litigation between the parti's and the consent decrees pcissed
there in left the promoters' commission in tact. Meanwhile the
Companies Act, I 956, came into force and the company served
a notice to the appellant saying that the promoters' commission was no longer lawful and that.art. 3 would be deleted.
The appellant then brought the suit out of which the present
appeal arose, for a declaration that the agreement to pay
cor.-imission was valid and for an injunction rf"Str::iining the
company from deleting the said art. 3. It was urged on behalf
of the companv that s. 76( l) anrl (2) of the '"id Act had made
the agreement invalid and unenforceable. The trial court found
in favour of the company and di~mis~ed the suit.
The court
of appeal agreeing, with the trial court dismissed the appeal·
1!162
K.M.S. Reddy,
Commissioner of
Income-tax, Kera/a
v.
The West Co1at
Chemicals tJnd
!ndurtiies l.td
Tiidayat11llah .J,
1962
March 20.