1983 (4) TMI 30 - HC - Income Tax

Court corrects Tribunal error in capital gains apportionment, rules in favor of assessee.

Raghubar Narain Singh Versus Commissioner Of Income-Tax

Raghubar Narain Singh Versus Commissioner Of Income-Tax - [1984] 147 ITR 447, 35 CTR 297, 16 TAXMANN 393 Issues Involved:1. Whether the entire sum of Rs. 1,94,299 could be treated and taxed as a capital gain of the assessee.2. The validity of the Income-tax Appellate Tribunal's decision regarding the computation of capital gains.3. The necessity of apportionment between the sale of shares and the delegation of managing director's powers.Detailed Analysis:1. Whether the entire sum of Rs. 1,94,299 could be treated and taxed as a capital gain of the assessee:The court examined whether the sum of Rs. 1,94,299, arising from the transfer of shares and the management of the Pacific Bank of India Ltd., could be treated as a capital gain. The petitioner, the karta of an HUF, had transferred shares and management to Shri A. K. Das for Rs. 7,60,000. The Income-tax Officer (ITO) computed the capital gain by deducting the cost of shares (Rs. 5,65,701) from the sale proceeds (Rs. 7,60,000), resulting in a capital gain of Rs. 1,94,299. The court was tasked with determining if this entire amount could be taxed as a capital gain.2. The validity of the Income-tax Appellate Tribunal's decision regarding the computation of capital gains:The Tribunal concluded that the price received by the petitioner was solely for the sale of shares, not for delegating the managing director's powers, as the petitioner was not competent to delegate such powers under the Indian Companies Act. The Tribunal upheld the ITO's computation of capital gains. However, the court found this approach erroneous, as it ignored the legal character of the agreement (Annexure B) which indicated that the consideration amount covered both the value of shares and the transfer of the managing director's office.3. The necessity of apportionment between the sale of shares and the delegation of managing director's powers:The court emphasized the need for apportionment between the value of shares and the delegation of managing director's powers. The agreement (Annexure B) clearly showed that the Rs. 7,60,000 consideration included both the shares' value and the transfer of management. The court referenced the definition of 'capital gain' under Section 12B of the Indian I.T. Act, 1922, which allows for deductions of expenditures solely related to the sale of the asset. The court highlighted that the Income-tax authorities must apportion the sum under different heads to compute the capital gains accurately. The court cited the case of Baijnath Chaturbhuj v. CIT [1957] 31 ITR 643 (Bom) to support the need for bifurcation in such transactions.Conclusion:The court concluded that the Income-tax Appellate Tribunal erred in law by not bifurcating the amount of capital gains under two heads: one for the value of the transfer of shares and the other for transferring the office of the managing director. The Tribunal's decision ignored the legal character of the agreement, which indicated that the consideration amount included both elements. The court answered the question in the negative, favoring the assessee and remanded the case to the Income-tax Appellate Tribunal to apportion the capital gains arising from the sale of shares and the price for delegating the power, and to compute them afresh after deducting certain allowances admissible under the Act.