Stock valuation and capital receipt principles: shares withdrawn at cost created no taxable profit, and deferred share rights stayed capital.

Commercial accounts accepted as genuine showed that 5,100 shares were withdrawn from a joint venture stock-in-trade at cost and not transferred at an enhanced market value, so no taxable profit could be imputed merely because the market price was higher. On that basis, the proposed addition for alleged embedded profit was not sustainable. The document also states that a right to the issue of deferred shares, acquired along with the shares and not converted into stock-in-trade, retained its capital character; sale proceeds from that right were therefore capital receipt. The note concludes that a capital-versus-revenue character depends on the asset's treatment and the accounting record.

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Issues: (i) Whether the sum of Rs. 76,000 was taxable as profit embedded in 5,100 shares taken over by the assessee from the joint venture. (ii) Whether the sum of Rs. 13,000 realised on sale of the right to the issue of deferred shares was a capital receipt.

Issue (i): Whether the sum of Rs. 76,000 was taxable as profit embedded in 5,100 shares taken over by the assessee from the joint venture.

Analysis: The decisive question was whether the joint venture had valued the 5,100 shares at a price above cost and transferred them to the assessee in satisfaction of his share of profit, or whether those shares were merely withdrawn by him from the stock-in-trade at cost. The statement of account, treated by all authorities as a faithful record, showed that 5,100 shares were deducted from the venture stock, that the venture accounts were made up only on the remaining shares, and that the assessee was debited with the cost of those shares. The accounts therefore negatived any inference that the shares were taken over at a market value of Rs. 65 per share or that additional profit of Rs. 76,000 accrued to the assessee.

Conclusion: The addition of Rs. 76,000 was not sustainable and was deleted.

Issue (ii): Whether the sum of Rs. 13,000 realised on sale of the right to the issue of deferred shares was a capital receipt.

Analysis: The right to the issue of deferred shares was acquired along with the shares taken over by the assessee and there was nothing to show that the right had been converted into stock-in-trade. The right was thus an incident of capital in the assessee's hands, and any realisation from its sale retained that character.

Conclusion: The sum of Rs. 13,000 was a capital receipt.

Final Conclusion: The reference succeeded on the principal tax addition in dispute and on the character of the receipt from the deferred share right, while the remaining question was left unanswered as academic.

Ratio Decidendi: Where commercial accounts accepted as genuine show that shares were withdrawn from a joint venture stock-in-trade at cost, no taxable profit can be imputed merely because the market value may have been higher; a right attached to capital assets, if not turned into stock-in-trade, realises capital on sale.

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