1991 (1) TMI 195 - AT - Income Tax

Summary

Issues Involved:
1. Capital gains on sale of shares.
2. Classification of shares as capital assets under section 45.
3. Diversion of income by overriding title.

Detailed Analysis:

1. Capital Gains on Sale of Shares:
The primary issue revolves around whether capital gains arose from the sale of shares deposited by the assessee as security for a debt owed by a firm in which the assessee was a partner. The relevant facts are that the firm, M/s. Tube Distributors Agency, was indebted to M/s. Imkemex India Ltd., Calcutta, and had deposited the assessee's shares as security. Upon default by the firm, the shares were auctioned, and the proceeds were used to repay the loan. The assessee argued that since no part of the sale proceeds was received by him, no capital gains should be taxable. However, the Income Tax Officer (ITO) disagreed and computed a capital gain of Rs. 67,334, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Classification of Shares as Capital Assets Under Section 45:
The assessee contended that shares could not be considered capital assets under section 45 because they were not capable of improvement by expending money. This argument was based on a misinterpretation of the Bombay High Court's decision in Evans Fraser & Co. Ltd. v. CIT, which dealt with goodwill, an intangible asset, whereas shares are tangible assets. The Tribunal found no merit in this contention and rejected it, affirming that shares do constitute capital assets under section 45.

3. Diversion of Income by Overriding Title:
The assessee also argued that since the sale proceeds were appropriated towards loan repayment, it constituted a diversion of income by overriding title, thus no capital gains should be chargeable. This argument was supported by decisions from the Bombay and Hyderabad Benches of the Tribunal in similar cases, where it was held that no capital gain accrued to the assessee because the entire sale consideration was used to satisfy the mortgage debt.

However, the Tribunal in the present case disagreed with this view, stating that the concept of overriding title applies only when there is a pre-existing charge or encumbrance on the property at the time of its acquisition or created by law. In this case, the shares were voluntarily deposited as security for a loan, and the loan repayment constituted part of the consideration received by the owner (assessee) upon the sale of shares. The Tribunal emphasized that the extinguishment of the debt liability due to the appropriation of sale proceeds also constituted a benefit and part of the consideration received by the assessee.

Conclusion:
The Tribunal concluded that the revenue authorities were justified in holding that capital gains arose from the sale of shares. The appeal was dismissed, affirming the CIT(A)'s order and the ITO's computation of capital gains. The Tribunal clarified that the assessee benefited from the extinguishment of the debt liability and was deemed to have received the sale proceeds, thus making the capital gains taxable.