Surplus on liquidation of shares held as stock-in-trade is taxable as revenue receipt.

Surplus received by a dealer in shares on liquidation of a company was treated as a revenue receipt where the shares were consistently held as stock-in-trade. The Court reasoned that distribution of assets on liquidation is made to shareholders by reason of their shareholding, and the absence of a formal sale or transfer does not change the substance of the receipt. As the assessee had treated the shares as trading stock in earlier and relevant assessments, the surplus realised on liquidation retained the character of trading profit and was taxable in the hands of the assessee.

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Issues: Whether surplus received by a dealer in shares on liquidation of a company, whose shares were held as stock-in-trade, is assessable as revenue receipt in the hands of the assessee.

Analysis: The assessee had consistently treated the shares as stock-in-trade in earlier assessments and in the relevant assessment year, and was bound by that position. On liquidation, the distribution of assets under section 511 of the Companies Act, 1956 is made to shareholders according to their rights and interests in the company, that is, by reason of their shareholding. The absence of a formal sale or transfer of shares does not alter the character of the receipt, because the amount received is in substance the value realised for the shares. Where the assessee holds the shares as trading stock, the surplus obtained on liquidation partakes of the same trading character.

Conclusion: The surplus received on liquidation was a revenue receipt and was taxable in the hands of the assessee; the answer to the referred questions was in favour of the Revenue.

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