Composite consideration for shares and managerial rights must be apportioned before computing capital gains tax.

Composite consideration for share transfer and delegation of managing rights had to be given its true legal character under Section 12B of the Indian Income-tax Act, 1922, so the taxing authority could not treat the whole receipt as capital gains from sale of shares alone. Where an agreement covers both shares and managerial rights, the total consideration must be apportioned between the distinct components before computing taxable capital gain and allowing permissible deductions. The article states that disregarding the structured transaction was wrong, and the proper computation required fresh apportionment of the receipt.

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Issues: Whether the entire sum of Rs. 1,94,299 could be treated and taxed as capital gains arising only from the sale of shares, or whether the consideration had to be apportioned between the transfer of shares and the delegation of powers connected with the managing directorship.

Analysis: The consideration under the agreement was found to be composite, covering both the shares and the transfer of managerial rights. Under Section 12B of the Indian Income-tax Act, 1922, capital gains had to be computed with reference to the true legal character of the receipt, and the taxing authority could not ignore the transaction as structured and treat the whole amount as referable only to share sale. The agreement was not challenged, and the tribunal's approach in disregarding the legal effect of the arrangement was held to be wrong. The proper course was to apportion the total consideration between the two components and then compute the taxable capital gain after allowing permissible deductions.

Conclusion: The question was answered in the negative and in favour of the assessee. The entire sum could not be taxed as capital gains arising only from the sale of shares, and the matter required fresh computation by apportionment.

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