Law: Income Tax Act, 1922

Section: 10(2)(vii),66(1)

Income-tax Act, 1922 -- Section 10(2) (vii) -- Income or capital -- Depreciation - Written down value -- Business conducted in partnership - Formation of private company and transfer of assets to company at original cost price -- Transaction whether 'sale' -- Held no -- Difference between the original cost and the written down value -- Whether taxable - Held no -- JUDGMENT (SHAMEEM HUSSAIN KADRI J.) This is a reference made by the Income-tax Appellate Tribunal, Karachi, under Section 66(1) of the Income-tax Act, at the instance of the Commissioner of Income-tax, Karachi. 2. The facts of the case are that on the 2nd of June, 1961, a firm consisting of five partners decided to convert the same into a private limited company. The firm was carrying on the manufacture and sale of condensed milk ice cream etc. On the eve of the transfer of the asset of the firm to the private company, all the assets and liabilities of the firm are taken over by the company at its book value. The fixed assets were transferred at their original cost of Rs. 4,20,801 while the written down value of the assets was estimated at Rs. 2,13,587. The difference between the original cost and the written down value i.e. a sum of Rs. 2,07,214 was treated by the Income-tax Officer as profits and tax was levied on this profit under the second proviso of Section 10(2)(vii) of the Income-tax Act. 3. An appeal was filed by the assessee before the tribunal claiming that the transfer of the fixed assets was not within the mischief of Section 10(2) (vii) of the Income-tax Act as the shares alloted by the limited company to its shareholders were equivalent to the shares of the partners of the previous firm. In these circumstances, there was no sale which could result in any profit. 4. The tribunal on the 13th of November, 1963 accepted the appeal and decided that the difference between the original cost and the written down value of the assets was not profits and, as such, it could not be assessed to tax by the Income-tax Officer. 5. On the application of the Commissioner of Income-tax, Karachi, the tribunal made a reference to this court for the determination of the following question:- "Whether on the…

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