Exchange for shares is not a sale; market value of shares governs tax computation, not face value.
A transfer of a cinema concern in exchange for preference shares was treated as an exchange, not a sale, because a sale under the Indian Income Tax Act, 1922 requires consideration in money price. The legal character of the transaction had to be gathered from the instrument itself and its true juridical effect, and the authorities could not recharacterise a genuine document without legal grounds. For tax computation, the relevant consideration was the actual market value of the shares received, not their face value, because face value did not reflect the real economic worth of the bargain.
Issues: (i) Whether the transfer of the cinema concern in exchange for preference shares amounted to a sale within section 10(2)(vii) of the Indian Income Tax Act, 1922; (ii) Whether, in computing the consideration, the face value or the market value of the shares was to be taken into account.
Issue (i): Whether the transfer of the cinema concern in exchange for preference shares amounted to a sale within section 10(2)(vii) of the Indian Income Tax Act, 1922.
Analysis: The decisive factor was the legal character of the transaction, which had to be gathered from the instrument itself and the true juridical effect of its terms. A sale, for purposes of the Act, required a transfer for money price. The statutory definitions in the Transfer of Property Act, 1882 and the Sale of Goods Act, 1930 supported the view that price denotes money, while exchange covers mutual transfer of property where neither thing transferred is money only. Since the consideration here was transfer of shares and not money, the transaction could not be treated as a sale. The authorities could not recharacterise the document by resort to supposed intention or by going behind a genuine instrument in the absence of legal grounds to impeach it.
Conclusion: The transaction was an exchange and not a sale, and therefore fell outside section 10(2)(vii) of the Indian Income Tax Act, 1922.
Issue (ii): Whether, in computing the consideration, the face value or the market value of the shares was to be taken into account.
Analysis: Having regard to the nature of the consideration, the relevant value for tax computation was the actual market value of the shares and not merely their face value. Face value did not furnish a proper criterion for assessing the economic worth of the consideration received. The computation of profits, if any, had to proceed on the real market value of the shares transferred in discharge of the bargain.
Conclusion: The market value of the shares, not their face value, had to be taken into account.
Final Conclusion: The reference was answered in favour of the assessee on both questions, the first being answered against treating the transaction as a sale and the second in favour of valuation by market value.
Ratio Decidendi: Where the consideration for a transfer is not money but shares, the transaction is an exchange and not a sale, and for tax computation the true market value of the shares, rather than their face value, governs the assessment of consideration.
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