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Issues Involved:
1. Determination of the quantum of capital gains for shares sold. 2. Whether the sale price per share should be taken at Rs. 65 or Rs. 46 for computing capital gains under Section 12B(2) of the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Determination of the Quantum of Capital Gains for Shares Sold: The two assessees, holding 6,689 and 7,995 shares respectively in Gujarat Cotton Mills Co. Ltd., sold these shares, and the Income-tax Officer taxed certain amounts as capital gains under Section 12B of the Indian Income-tax Act. The dispute centered around the correct quantum of capital gains. The Tribunal was tasked with determining whether the sale price per share should be considered as Rs. 65 or Rs. 46 for the purpose of computing capital gains. 2. Whether the Sale Price per Share Should Be Taken at Rs. 65 or Rs. 46 for Computing Capital Gains: The Tribunal found that the market value of the shares on the relevant date was Rs. 46 per share. The assessee contended that the excess price of Rs. 65 per share over the market value should be attributed to the relinquishment of managing agency rights, which were to be surrendered as per the agreement. The Tribunal rejected this contention, stating that the full value of the consideration for the shares should be taken at Rs. 65 per share as per the agreement. Judgment Analysis: Background and Agreements: In 1938, Shantilal Bhagwandas & Co. held the managing agency of Gujarat Cotton Mills Co. Ltd. and agreed to assign it along with 4,736 shares to Peeramal Chaturbhuj for Rs. 7,51,000. On 7th September 1946, Peeramal Girdharlal & Co. entered into an agreement with Messrs. Chaturam & Sons to relinquish their managing agency rights and get Chaturam & Sons appointed as managing agents. The agreement included the sale of 65,012 shares at Rs. 65 per share. Tribunal's Findings: The Tribunal concluded that the primary objective of the 1946 agreement was to appoint the purchasers as managing agents, not merely to sell shares. It was found that the market value of the shares was Rs. 46 per share. Despite this, the Tribunal upheld the Department's view that the sale price should be taken at Rs. 65 per share because the parties did not apportion the price between the shares and the managing agency rights. Court's Judgment: The High Court held that the full value of the consideration for the shares should be the true market value, not an artificial value assigned by the parties. Since the market value was Rs. 46 per share and the agreement was composite (involving both shares and managing agency rights), the consideration of Rs. 65 per share included payment for both assets. Therefore, the full value of the shares within the meaning of Section 12B(2) was Rs. 46 per share, not Rs. 65. Conclusion: The Court concluded that for the purposes of Section 12B(2), the sale price per share should be taken at Rs. 46. Additionally, the assessee was entitled to exercise the option under the proviso to Section 12B(2) to substitute the fair market value as of 1st January 1939 for the actual cost of the shares. The Commissioner was ordered to pay the costs of the reference. Reference Answered Accordingly: The sale price per share should be taken at Rs. 46 for computing capital gains.
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