1978 (6) TMI 7 - HC - Income Tax

Summary

Issues:
Whether the provisions of section 44E of the Indian I.T. Act, 1922 were attracted in transactions involving the sale and repurchase of shares by an individual to three employees of a private limited company.

Detailed Analysis:

The judgment pertains to the assessment years 1952-53, 1953-54, and 1954-55, involving transactions between an individual, his wife, and three employees of a private limited company. The employees purchased shares from the individual, and subsequently, the shares were repurchased by the individual. The Income Tax Officer (ITO) contended that these transactions were benami and the dividends received should be treated as the individual's income or, alternatively, that section 44E of the Indian I.T. Act, 1922 was applicable, taxing the dividends as the individual's income.

The Appellate Assistant Commissioner (AAC) upheld the ITO's findings, but the Tribunal reversed them, concluding that the employees held the shares on their own account and not as benamidars of the individual. The Tribunal also ruled that the provisions of section 44E were not attracted in this case.

The revenue sought a reference on whether section 44E applied, arguing that the employees were company employees, purchased and resold shares on the same day, and did not pay for the shares in cash. The revenue contended that the individual either agreed to buy back the shares or acquired an option to do so.

The court analyzed the provisions of section 44E, which deal with avoidance of tax through certain securities transactions. The court found that there was no evidence of an agreement to buy back the shares or the acquisition of an option by the individual. The evidence presented did not support the revenue's argument that section 44E applied, as the employees were under no obligation to sell the shares back to the individual at a fixed price.

Ultimately, the court held that the provisions of section 44E were not attracted in the transactions in question. The court ruled against the revenue, stating that the employees held the shares on their own account, and the individual did not have an agreement or option to repurchase the shares. Therefore, the court answered the reference question in the negative, with costs awarded to the assessee.