1964 (10) TMI 106 - HC - Income Tax

Court rules transaction as exchange, not sale, due to consideration in shares not money. Market value, not face value, used for tax assessment.

Motors and General Stores (Private) Ltd., Bobbili Versus Commissioner of Income Tax, Andhra Pradesh, Hyderabad

The court determined that the transaction in question was an exchange, not a sale, as the consideration involved shares, not money, thus falling outside ... - Issues Involved:1. Whether the transaction dated 19-9-1956 amounts to a sale within the purview of the second proviso to section 10(2)(vii) of the Indian Income Tax Act.2. Whether the consideration for the sale is not the market value of the shares as on the date of the transaction but the face value of the shares.Issue 1: Whether the transaction dated 19-9-1956 amounts to a sale within the purview of the second proviso to section 10(2)(vii) of the Indian Income Tax Act.The assessment in question pertains to the year 1956-57, relating to the accounting period of 1955-56. The assessee, a private limited company operating a cinema house, resolved to sell its entire concern, including all equipment, machinery, fittings, spares, accessories, buildings, cash deposits, and goodwill, to the Zamindar and Zamindarini of Chikkavaram for a consideration of Rs. 1,20,000/-. This amount was to be received in the form of 5% tax-free cumulative preference shares of M/s. Sri Rama Sugars and Industries Ltd., Bobbili, held by the Zamindarini. This transaction was executed through a deed of exchange dated 21-2-1956.The Income Tax Officer assessed the total value of the transferred assets at Rs. 76,432/- and computed the profits under section 10(2)(vii) of the Act at Rs. 43,568/-, adding this to the income of the assessee. The assessee contended that the transaction was not a sale but an exchange, and hence, fell outside the purview of section 10(2)(vii). The Appellate Assistant Commissioner and the Tribunal rejected this contention, treating the transaction as a sale.The court emphasized that the nature of an instrument should be determined by its contents and not by its description. The facts disclosed that the cinema and other properties were not sold for a money price but were exchanged for shares. The court referred to section 54 of the Transfer of Property Act, which defines 'sale' as a transfer of ownership in exchange for a price paid or promised, with 'price' interpreted to mean money. The court also referred to section 118 of the Transfer of Property Act, which defines 'exchange' as the mutual transfer of ownership of one thing for another, excluding money.The court concluded that the transaction was not a sale but an exchange, as the consideration for the transfer was not money but shares. Consequently, the transaction did not fall within the purview of section 10(2)(vii) of the Income Tax Act.Issue 2: Whether the consideration for the sale is not the market value of the shares as on the date of the transaction but the face value of the shares.Although the court's conclusion on the first issue rendered the second issue moot, it addressed the arguments presented. The assessee argued that the Income Tax Officer should have considered the market value of the shares rather than their face value when computing the profits. The court noted that the market value is the appropriate criterion for determining the assessable value of shares, not the face value. The court cited various cases where the market value of shares was used for tax assessment purposes.The court concluded that the Income Tax Officer should have taken the market value of the shares into consideration in computing the profits.Conclusion:The court answered the first question in the negative, concluding that the transaction was not a sale but an exchange. The second question was answered in the affirmative, stating that the market value of the shares should be considered for tax computation. The reference was answered accordingly, with costs awarded and an advocate's fee of Rs. 200/-.