ABDUR REHMAN KHAN KAIF, J.-The assesses in this case is a partnership firm known as Messrs Karim Industries (hereinafter called the firm). This firm had been carrying on business of Steel Re- Rolling and Iron Manufactur--ing. The firm in addition to the normal return relating to the previous year ending 30th March 1961 filed a supplementary return covering the accounting period 1-4-1961 to 30-6-1961. The Income-tax Officer treated this as relating to the assessment year which be termed as assessm ent year 1961-62 (supplementary) and passed the assessment order thereon. It trans--pired that the assessee firm had transferred all its assets and liabilities including its fixed assets like land, building, machinery etc., to a limited company of the same name and style, namely, Karimi Industries Ltd. The transfer of the assets was accordingly treated by the Income-tax Officer as sale of assets within the meaning of section 10(2)(vii) of the Income-tax Act, 1922 and the difference between the transfer value and the written down value totalling Rs. 1,54,230 was included in the total income of the assesses for the purpose of levy of income-tax. "
2. Being aggrieved the assessee filed an appeal before the Appellate Assistant Commissioner where several objections were raised. The Appellate authority by his order dated 5-12-1966 set aside the order on the ground that the income of the period in question related to the assessment year 1962-63 and not to 1961-62 and that fresh assessment for the assessment year 1962-63 for the period of three months should, therefore, be made while disposing of the matter, the said Appellate authority observed that the objection relating to the computation of the income under section 10(2)(vii) was not seriously pressed before him and the same was accordingly rejected. When the matter came up again before the Income-tax Officer the assessee's objection with regard to the computation of profits under the above-mentioned provisions of law was brushed aside on the ground that this objection as stated above was not pressed before the Appellate authority. The assesses filed an appeal against this order dated 27-6-1968 but did not succeed as it was dismissed on 9-9-1968 for similar reasons. Consequently, the assessee firm then moved the Income-tax Appellate Tribunal, Peshawar Bench. Peshawar. The Tribunal vide, its order dated 23-2- 1970 while allowing the appeal decided the case in favour of the assesses.
Consequently the following question of law formulated by the Commissioner of Income-tax was referred to us by the Tribunal in accordance with the provisions contained in section 66(1) of the Act for opinion :-- ---Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that transfer of assets in this case did not constitute a sale which could attract the provisions of section 10(2)(vii) of the Income-tax Act, during the year 1962-63?
3. In this case referred to us the facts already noticed clearly show that the partners of the firm formed themselves into a private (limited com--pany. The partners are the same and the shares allotted to each of them in the company are also in the same proportion as the shares held by them in the firm. It is thus evident that the assets, the partners of the firm and the shareholders of the company are the same and identical.
4. In the instant case it is to be determined whether a transaction such as the one before us would be a "sale" within the meaning of section 10(2)(vii) of the Act. The material part of the section is :-
(i) That the tax shall be payable by an assessee under the head (Profits and Gains of Business.
Profession or Vocation) in respect of the profits or gains of (business, profession or vocation) carried on by him;
(ii) (Subject to the provision of this Act) such profits and gains shall be computed after making the following allowances, namely :- "In respect of any such building, machinery or plant which has been sold, transferred by way of exchange or is compulsorily acquired by a competent authority under any law for the time lading in force, or discarded or demolished or destroyed in the previous years, the amount by which the written down value therefore exceeds the amount for which the building, machinery or plant is actually sold, transferred or compulsorily acquired, as the case may be, or its scram value; Provided that such amount is actually written off is the; book of the assessee: Provided further that where the amount for which such building machinery or plant is sold, transferred or compulsorily acquired, he--their during the continuance of the business or after the cessation thereof, exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale, transfer or compulsory acquisition, as the case may be, took place . . . . ."
5. On gong through the above-quoted provisions of law, it appears that if a firm sells its assets to another company, the vendor is liable to pay income-tax for the difference between the transfer value and the written down value on the date of sale i.e. The profits earned by it. In the instant case, the difference between the original cost and the written down value was assessed at Rs. 1,25,043.
The difference between the original cost and the written down value after allowing depreciation comes to Rs. 1,54,230 which was taxed as a profit in terms of section 10(2)(vii) of the Act.
6. Mr. Amirzada Khan, learned Advocate appearing for the Commis--sioner of Income-tax submitted that the firm has sold all its assets to the company which has separate legal status and having shown a profit is thereby liable to assessment. He maintained that the transfer in the instant case was by one legal entity to another legal entity and not by one individual shareholder to another individual shareholder and, as such, is clearly a sale within the meaning of the above- quoted provisions of law, even if the partners of the firm are identical and he same. Reliance was placed by the learned counsel in this behalf on the Commissioner of Income-tax v. A. K. Plywood Company (1980 PTD 270 ) and The Commissioner of Income-tax, North Zone, Lahore v. Haji Abdul Majid Khan Zaman & Co. (PLD 1973 Lah. 843).
Haji Maqsood Ahmed, Advocate appearing for the assessee on the other hand, relying on Commissioner of Income-tax v. Publix Industries (PLD 1969 Kar. 606), sub--mitted that the transfer in question is not a sale within the meaning of the above-quoted provisions of the Act and may be treated as a conversion into a different company. He submitted that the shareholders being the same persons with the same assets the question of earning profit by such transfer is not imaginable and stressed that the case being of a clear conversion of the share capital of the firm into that of a limited company, this transaction shall not be termed as a "sale".
7. On a reference to the paper-book it becomes evident that the case was argued before the Appellate Tribunal on the basis of Dacca and Karachi authorities referred to above and accepting the view expressed by their lord--ships of the Karachi High Court, the Tribunal came to the conclusion that the transaction of transfer of the assets of the firm in question was not a sale so as to attract she provisions of second proviso to section 10(2)(vii) of the Act.
8. In the Dacca case quoted above, the partners of the firm who were carrying or, business of manufacturing and sale of plywood, tea and tea-chest etc., formed themselves into a private limited company, the shares allotted t, each of them in the company being in the firm having the written down value of Rs. 2,13,349 were transferred to the company at the original cost pf Rs.
5,89,316. The question for the decision before the High Court way, whether the transaction was "sale" within the meaning of the second proviso to section 10(2)(vii) of the Income-tax Act and the difference between the written down value and the original cost was liable to tax. A. S. Chodhary and K. M. Hassan, JJ. Heard the mentioned case and held that :-
(i) If a firm sells its assets to another company the vendor is liable to pay income-tax for the difference between the written down value on the date of the sale and the price at which the assets are actually sold, that is the profits earned by it, even if the partner; of the firm are identical ; and
(ii) there is no exception in the second proviso to clause (vii) of. Section 10(2) to the effect that if the property remains in the same hands it will not be a sale within the meaning of this section. If there is a sale in the eye of law and if a profit results there from, the making of such profits is liable to taxation."
Reliance in the above view was placed on a D. B. Decision; of Indian High Court reported as Maharajadehiraj Sir Kameshwar Singh v. Commis--sioner of Income-tax ((1963)48 ITR 483), wherein it was observed : - "The assessee, though he was the owner of all the shares in the company, cannot claim to be treated as if ha were identical with the company in order to promote his own benefit or advantage.
The assessee and the Company were distinct legal entities and the sum in question was rightly assessed to income-tax."
9. In the case reported as P L. D 1973 Lab. 843, a similar question was examined which was answered in the negative by making the following observations:-- "Once a company has been duly incorporated under the Companies Act it becomes a person different from its shareholders. These very share holders in the instant case were the partners in the firm of the same name. They transferred the property of the firm to the Company and we have seen that they were not the Company, therefore, the transfer was by the persons in the firm to the other legal personality, that is, the corporation which had been brought into being under the Companies Act. The ingredients of a sale, that is, transfer of the property by one person to another for a consideration were all present and the mere fact that the partners of the late firm were the only share holders of the corporation would not, we respectfully say, detract from the independent legal personality of the corporation."
10. In the Karachi case cited at the bar the view expressed is to the effect that a company legally is a separate entity from the subscriber of the Company but logically and commercially it makes no sense at all that when partners in a firm decide to float a new Company with almost the same shares in the new Company to the extent of their shares in the firm they would be buyers and sellers of their own interest. According to the view expressed therein this arrangement shall not be considered a sale but only readjustment for the purposes of carrying on the business in another firm.
11. With greatest respects for the view expressed we are unable to agree with the above observations as the process by which ordinary partner is transmuted into a Company effects a fundamental change in the legal relations of its members. It is nothing else than the birth of a new being, to whom the whole business and property of the partnership is transferred, a being without soul or body, not visible save to the eye of the law.
It is, therefore, quite clear that once a Company had been duly incorporated under the Companies Act, it becomes person completely different and distinct from its shareholders. The shareholders of that Company do not own anything owned by the Company and a sale to the Company can never be considered a sale to the shareholders because the property of the Company is not the property of the shareholders. There is no dispute about the fact that a Company is a legal personality entirely different from its members. Similarly a Company is capable of enjoying rights and of being subjected to the duties which are not the same as these enjoyed or borne by its members. As such, the proposition that no body can sell to himself and make profits out of such a sale will not be- attracted to such cases as it will be a transfer by one legal entity to another legal entity and not by an individual shareholder to another shareholder.
12. The object of clause (vii) to section 10(2) and the second proviso to it are quite clear. Clause (vii) grants allowance in respect of property which is discarded, demolished or destroyed whereas the object of the second proviso is to bring to charge by fiction the excess of the sale price over the written value. They apply to two different situations, though they are in. Respect of the same property, namely, the one which was used in the previous year. It cannot, however, be treated as an independent provision of law because it relates to the same property which is referred to in the mentioned enactment and it is only by fiction that the profits have been treated for the purposes of taxation even in cases where the sale takes place after the close of the corporation.
13. In the present case before us we are confronted with the main question whether the transfer in question is a "sale" and such a sale can be brought within the mischief of section 10 (2)(vii) of the Act. Subsection to section 10 provides that an assessee is liable to pay tax in respects:: profits or gains of any business. There is no denying the fact that the firn-3 in question has earned a profit by the transfer of its assets as the sale price exceeds the written down value of the said assets which is obviously a sale. Now the next question which is to be answered is whether to such a sale proviso to clause (vii) of section 10 (2) is attracted. On going through the relevant provisions, we find no clear exception in the second proviso to clause (vii) to the effect that if the property remains in the same hands it will not be a sale within the meaning of this section. A similar view was taken in the Dacca case cited during the arguments. In the circumstances it will be a sale in the eye of law as assets were transferred to a different Company having a separate legal entity. They: is no provision to the effect that if there is a sale from one set of persons to another, profits earned thereon would not be liable to taxation. The intention of the Legislature must be given effect to in letter and spirit and we, therefore, entertain no doubt in our mind that there is no ambiguity whatsoever, as we are not permitted to read into the proviso any words which are not there.
14. For the reasons stated, we are, therefore, of the view that the transaction in question has all the components of sale in terms of the relevant provisions of law and would, therefore, accept the reference, answer the question in the negative but in the circumstances of the case, shall make no order as to costs.