1972 (2) TMI 11 - HC - Income Tax

Court rules shares received as capital, not revenue. Tribunal error in valuation. Petitioner not liable for tax.

The court determined that the sum of Rs. 30,000 received in the form of shares was a capital receipt, not a revenue receipt, in the hands of the ... Whether the Tribunal could hold that a sum of Rs. 30,000 being the face value of three hundred fully paid up shares of firm, was not capital but revenue receipt in the hands of the petitioner liable to tax - Assessee obtained dealership of petrol. He transferred the dealership rights to a company for a consideration of fully paid up shares - Tribunal, therefore, ought to have determined the market value of the shares at the time and it erred in arriving at the conclusion that the face value of the shares would constitute the revenue receipt Issues Involved:1. Whether the sum of Rs. 30,000, being the face value of 300 fully paid-up shares of Messrs. Delhi Gate Services (P.) Ltd., was capital or revenue receipt in the hands of the petitioner liable to tax.2. Whether the entire face value of the shares constituted revenue receipt which was assessable to tax.Issue-wise Detailed Analysis:1. Nature of the Receipt: Capital or RevenueThe primary issue was whether the Rs. 30,000 received by the assessee in the form of shares was a capital receipt or a revenue receipt. The Income-tax Officer treated this sum as remuneration for services rendered by the assessee in obtaining dealership for the limited company, thus categorizing it as income. The assessee, however, argued that this was a capital receipt.The court examined the facts and the agreement between the assessee and the newly floated company, which indicated that the assessee had transferred his dealership rights to the company in exchange for 300 shares. The court noted that the dealership constituted the capital of the assessee and was not a trading asset. Therefore, the consideration received for transferring this capital should also be considered capital, not revenue.The court referred to several judicial authorities, including the Supreme Court's decision in Senairm Doongarmall v. Commissioner Of Income-tax and Commissioner of Income-tax v. Prabhu Dayal, which supported the view that compensation received for not carrying on business or for transferring a capital asset is not revenue. The court concluded that the sum of Rs. 30,000 was not a revenue receipt but a capital receipt.2. Entire Face Value of Shares as Revenue ReceiptEven if the receipt was considered revenue, the question was whether the entire face value of Rs. 30,000 should be treated as such. The Tribunal had held that the face value of the shares constituted the revenue receipt. However, the court found that the Tribunal did not determine the market value of the shares at the time of receipt, which was necessary to ascertain the actual income.The court observed that the Tribunal erred in concluding that the face value of the shares would constitute the revenue receipt without determining their market value. The court emphasized that income received in money's worth should be valued based on market conditions prevailing at the time of receipt.ConclusionThe court answered the first question in the negative, holding that the amount in dispute was not a revenue receipt but constituted capital in the hands of the petitioner and was not liable to tax. Consequently, the second question did not arise for consideration, but the court still answered it in the negative, stating that the Tribunal should have determined the market value of the shares rather than their face value. The reference was answered accordingly, with costs awarded to the assessee.