HON’BLE SUPREME COURT · SOURCE-REVIEWED NOTE
Commissioner of Income-tax, Gujarat v. M/s. B. M. Kharwar
Civil Appeal No. 1678 of 1966
[1969] 1 SCR 651 ·
Indian Income-tax Act, 1922: section 10(2)(vii), second proviso, as amended by Act 67 of 1949 · Indian Income-tax Act, 1922: section 66(5)
Sources & disclosures includedDownload original judgment / order
3-judge bench; unanimous judgment delivered by J. C. Shah, J. · J. C. Shah, J. · V. Ramaswami, J. · A. N. Grover, J.
Assessment years: 1959-60
01 · Facts of the case
The respondent firm manufactured, purchased and sold cloth. It closed the manufacturing side and transferred factory machinery to a private company whose share capital reflected the partners' existing interests in the firm's assets and profits. For assessment year 1959-60 the Income-tax Officer invoked section 10(2)(vii), second proviso, to tax Rs.40,743 as realisation above written-down value. The Tribunal treated the change as carrying on through a company rather than a firm and found no business profit; the Gujarat High Court answered the referred taxability question in the negative. Revenue appealed by certificate (SCR pp.652-653; PDF pp.2-3).
Source: Primary judgment: facts
02 · Discussion by the Hon’ble Court
Tax liability had to follow the true legal relation created. The firm and company were distinct entities, and a transfer for consideration could not be treated as non-existent merely because partners received corresponding company interests. Authorities could unravel a concealed device, but they could not displace the legal effect of a genuine transaction by invoking an undefined 'substance' different from the parties' actual rights and liabilities (SCR pp.654-656; PDF pp.4-6). The 1949 amendment made the qualifying excess taxable whether sale occurred during business or after cessation, so a realisation or winding-up sale was not excluded for that reason alone (SCR pp.657-658; PDF pp.7-8). Yet section 10(2)(vii) still required a sale. Transfer for shares alone might be exchange, whereas a money-price obligation satisfied by shares could be sale plus discharge. Because the Tribunal had not made the needed finding, the reference could not be answered on the record (SCR pp.658-659; PDF pp.8-9).
Source: Primary judgment: discussion
03 · Judicial decision
The Court allowed Revenue's appeal, discharged the High Court's answer and permitted the Tribunal to rehear the parties under section 66(5) and record clear findings in light of the judgment. It did not finally decide whether the machinery transfer was a sale attracting the Rs.40,743 charge. There was no order as to costs in the Supreme Court or High Court (SCR p.659; PDF p.9).
Source: Primary judgment: decision
04 · Outcome / in whose favour
Mixed outcome with limited procedural relief to Revenue. The legal bases adopted below were rejected and the reference reopened, but the assessee's ultimate tax liability remained dependent on the Tribunal's sale-versus-exchange finding (SCR pp.656-659; PDF pp.6-9).
Source: Primary judgment: outcome
05 · AKHB REVIEW POINT
AKHB analysis: in an asset transfer on conversion or incorporation, document separately the transfer instrument, stated money price, share allotment, discharge mechanics, continuity of business and statutory year. Legal-entity continuity of ownership interests does not erase the transfer, but classification as sale, exchange or another arrangement turns on the actual consideration rights. Apply current depreciation, transfer and anti-avoidance provisions independently; this limited historical remand is not a final current-law taxability ruling (based on SCR pp.655-659; PDF pp.5-9).
Source: Primary judgment: reviewPoint
Source & verification
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Statutory scope
The decision construes the balancing-charge language of section 10(2)(vii) of the repealed Indian Income-tax Act, 1922 after the 1949 amendment and before later statutory regimes. Its sale-versus-exchange analysis and strict-legal-effect reasoning must not be presented as current depreciation, transfer, capital-gains or anti-avoidance law. No current-law or later-treatment clearance was undertaken.
Later treatment
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