Law: Income Tax Act, 1922

Section: 10(2)(vii)

(Appeal from the judgment and order of the Gujarat High Court, dated September 22, 1965, in Income-tax Reference No. 10 of 1965). Income-tax - Depreciation - Balancing charge-Law after .amendment in 1949-Transfer of assets from firm to company Realisation sale-Balancing charge whether leviable-Legal charac ter of transaction whether can be ignored-Income-tax-General principles-Substance against form of transaction-Indian Income tax Act, 1922, S. 10(2)(vii), proviso (ii) (after amendment in 1949). It is now well-settled that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as "the substance of the matter". The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by prob ing into the "substance of the transaction". This principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence oral and documantary-and conduct of the parties to the transaction. Duke of Westminster v. Commissioners of Inland Revenue 1935) 19 T C 490 (H L) ; Bank of Chettinad Ltd. v. Commissioner of Income-tax (1940) 8 I T R 522 (P C) and Commis sioner of Income-tax v. Motor & General Stores (Pvt.) Ltd. (1967) 66 I T R 692 (S C) fol. Observations in Sir Kikabhai Premchand v. Commissioner of Income-tax (1953) 24 I T R 506 (S C) to the effect that in revenue uses regard must be had to the substance of the transaction rather than its mere form cannot be read as throwing any doubt on the principle that the true legal relation arising from a transac tion alone determines the taxability of a receipt arising from the transaction. The observation is casual and it was not necessary for the purpose of the case. Where machinery…