1937 (8) TMI 12 - HC - Income Tax

Court rules allotment of shares not taxable as income under Sec. 4(3)(vii)

In Re : Mahammad Faruq

The court ruled in favor of the applicant, determining that the allotment of shares did not constitute assessable income under the Act. The court found ... - Issues:1. Whether the fully paid up shares allotted to the applicant amount to income assessable under the law or are mere receipts of a casual and non-recurring nature.2. Whether the allotment of shares constitutes income within the meaning of the Act and if so, whether it is exempted under Sec. 4(3)(vii) of the Act.Detailed Analysis:1. The case involved a question of law referred by the Commissioner of Income tax regarding the taxability of fully paid up shares allotted to the applicant by the Directors of a company. The applicant, who was initially employed as a manager, received shares worth &8377; 15,000 as recognition for his efforts in promoting investments in the company. The Income tax Officer assessed this allotment as taxable income, leading to an appeal by the applicant. The Assistant Commissioner dismissed the appeal, prompting the applicant to approach the Income tax Commissioner for a decision.2. The argument presented by the Income tax Department highlighted two key questions: first, whether the allotment of shares constitutes income under the Act, and second, if it qualifies as income, whether it falls under the exemption provided in Sec. 4(3)(vii) of the Act. The court noted that these questions are interrelated and not entirely independent. Citing the case law of Commissioner of Income Tax, Bengal v. Shaw Wallace and Company, the court emphasized the distinction between income and exempted receipts under the Act.3. The court analyzed the nature of income under the Act, noting that the term 'income' was not explicitly defined. Referring to the principles outlined by the Privy Council, the court concluded that income signifies a regular or expected monetary return from definite sources, excluding windfalls. In this case, the allotment of shares was deemed a windfall as it was not a result of a contractual obligation or a business activity. The applicant's receipt of shares was considered casual and non-recurring, lacking the regularity associated with income.4. Despite acknowledging a previous court decision in a different case, the court differentiated the present scenario as not falling under the definition of business activity that generates income. The court emphasized that business activities must aim for profit acquisition as a legal entitlement, which was not the case with the applicant's receipt of shares. Ultimately, the court concluded that the allotment of shares did not constitute assessable income under the Act and was exempt from taxation, ruling in favor of the applicant and directing the Department to bear the costs.In conclusion, the court's judgment clarified the distinction between income and exempted receipts under the Act, determining that the allotment of shares to the applicant was not taxable income but rather a casual and non-recurring receipt exempt from assessment.