1955 (9) TMI 65 - HC - Income Tax

Transfer of shares not taxable due to lack of real profit or asset; Commissioner to bear costs.

Commissioner of Income-Tax, Bombay City Versus Sir Homi Mehta's Executors

Commissioner of Income-Tax, Bombay City Versus Sir Homi Mehta's Executors - [1955] 28 ITR 928 Issues Involved1. Whether the assessee made any profit or gain by transferring shares to a limited company.2. Whether the transaction was a business activity undertaken with the object of making profit.3. Whether the transaction resulted in real profit liable to tax.4. Whether the nomenclature used in the agreement affects the nature of the transaction.5. Whether the assessee received a new and valuable asset.6. Whether the transaction was a mere readjustment of business position.Detailed Analysis1. Profit or Gain by Transferring Shares:The primary issue is whether the assessee made any profit or gain by transferring shares of 20 joint stock companies to a limited company. The shares were transferred at a market value of Rs. 40,97,000, while their cost price was Rs. 30,45,017. The department contended that this resulted in a profit of approximately Rs. 10-11 lakhs, which was liable to tax. However, the court found that the transaction did not result in any real profit or gain for the assessee. The shares were merely held in a different manner, through a limited company instead of individually.2. Business Activity with Object of Making Profit:The court examined whether the transaction was a business activity undertaken with the object of making profit. It was found that the shares were the stock-in-trade of the assessee. However, the transfer of shares to the limited company was not considered a business activity aimed at making profit. The court emphasized that the important test of a business activity is the objective of making profit, which was not present in this case.3. Real Profit Liable to Tax:The court stated that for income-tax purposes, the transaction must be looked at from a commercial point of view to determine if it resulted in real profit. It was concluded that the transaction did not result in any real profit for the assessee. The shares remained with the same individuals, albeit in a different legal form, and no actual sale or realization of money occurred.4. Nomenclature in the Agreement:The court noted that the mere description of a transaction as a sale does not necessarily make it a sale in substance or reality. Even if the agreement embodied a real sale, the significant fact remained that the sale was by the vendor to himself. The court held that a vendor cannot make a profit out of himself, and thus, the transaction did not result in any taxable profit.5. New and Valuable Asset:The court examined whether the assessee received a new and valuable asset. It was determined that the assessee did not receive any new and valuable asset. The shares of the new company represented the same shares that were transferred, and there was no new venture or different undertaking involved.6. Readjustment of Business Position:The court found that the transaction was a mere readjustment of the business position of the assessee and his sons. The shares were transferred to a company in which they were the only shareholders, resulting in no real profit or gain. The court cited the Privy Council's decision in Doughty v. Commissioner of Taxes, where a similar transaction was considered a mere readjustment with no profit.ConclusionThe court concluded that the assessee did not make any profit or gain in a commercial sense by transferring the shares to the newly formed limited company. Therefore, the difference between the market value of the shares at the date of transfer and their cost price did not make the assessee liable to pay tax. The reference was answered in the negative, and the Commissioner was ordered to pay the costs.