1987 (4) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Whether the purchase price of shares represented their market value on the date of purchase.
2. Whether the difference between the purchase price and the intrinsic value of the shares could be treated as income under section 2(24)(iv) of the Income-tax Act, 1961.
3. Whether the financial history and intrinsic value of the shares should affect their market value assessment.

Issue-wise Detailed Analysis:

1. Whether the purchase price of shares represented their market value on the date of purchase:

The Tribunal concluded that the shares were purchased at their market value based on the public subscription price. The shares of Dalmia Dairy Industries Limited (DDIL) were offered for public subscription at Rs. 10 per share, and the petitioners purchased these shares at the same rate. The Tribunal found that since any member of the public could have obtained the shares at Rs. 10, the petitioners did not receive any benefit by purchasing them at this price. This conclusion was supported by the fact that the shares were listed for public subscription and were available to anyone at the stated price.

2. Whether the difference between the purchase price and the intrinsic value of the shares could be treated as income under section 2(24)(iv) of the Income-tax Act, 1961:

The Income-tax Officer argued that the intrinsic value of the shares was Rs. 292.13 per share, and thus, the difference between this value and the purchase price should be treated as income under section 2(24)(iv). However, the Tribunal rejected this contention, stating that the market value of the shares should be determined based on the public subscription price rather than an artificial method like the break-up value. The Tribunal emphasized that there was no evidence to suggest that the public issue was a sham or that the shares were secretly allotted to close relatives. Therefore, the difference could not be treated as income.

3. Whether the financial history and intrinsic value of the shares should affect their market value assessment:

The Department contended that the financial history of DDIL, including its awards and litigation with the National Bank of Pakistan (NBP), indicated that the shares were worth much more than the face value. They argued that the directors and their relatives were aware of these proceedings and transferred the shares at a lower face value. However, the Tribunal found that the financial history was not exclusively known to the directors and was disclosed in the company's annual reports and prospectus. The Tribunal also noted that despite this information being available, the shares were not fully subscribed, indicating that the market did not perceive them to be worth more than the face value. The Tribunal held that the break-up value method was not appropriate for valuing the shares of a going concern and that the public subscription price was the correct market value.

Conclusion:

The Tribunal's conclusion that the purchase price of the shares represented their market value on the date of purchase was based on ample material and evidence. The Department's attempt to complicate the matter by referring to the financial history was found to be unhelpful. The Tribunal's decision was a simple conclusion of fact, and no reference was called for in any of the cases. The petitions were dismissed without any order as to costs.