Transfer for preference shares treated as exchange, not sale, so sale-based tax provision did not apply.

A transaction transferring a cinema house and its assets in return for preference shares was treated as an exchange, not a sale, because the operative document showed reciprocal transfer of properties rather than transfer for money consideration. The legal character of the transaction had to be determined from the document's terms, not its recital, the parties' description, or a stamp valuation. Since section 10(2)(vii) of the Income-tax Act, 1922 applied only where the transaction was in law a sale, the provision could not apply on these facts.

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Issues: Whether the transfer of the cinema house and its assets in return for preference shares was a sale within section 10(2)(vii) of the Income-tax Act, 1922, so as to attract taxation on the excess over written down value.

Analysis: The legal nature of the transaction was determined from the operative terms of the document and not from its recital or the parties' description of it. A sale, in the relevant legal sense, requires transfer of property for money consideration. The instrument showed a reciprocal transfer of properties for shares, which constituted an exchange and not a sale. In the absence of money consideration, the transaction could not be treated as a sale merely because the properties were valued at a stated amount for stamp purposes or because the parties had earlier spoken of a sale. The taxing statute had to be applied according to the true legal rights created by the document.

Conclusion: The transaction was not a sale and section 10(2)(vii) of the Income-tax Act, 1922 did not apply. The answer was therefore in favour of the assessee and against the Revenue.

Ratio Decidendi: For tax liability under a provision applicable only to a sale, the transaction must in law amount to a sale and cannot be treated as such where the consideration is an exchange of property rather than money.

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