1967 (5) TMI 3 - SC - Income Tax

ITO found that the value realised exceeded the written down value by ₹ 43,568 and accordingly computed the profits under s. 10(2)(vii) of the IT Act, 1922, and included the amount in the taxable income of the assessee-company - said transaction amounts to a sale within the purview of the second proviso to s. 10(2)(vii) - revenue s appeal dismissed

Summary

Issues Involved:
1. Whether the transaction dated February 21, 1956, amounts to a sale within the purview of the second proviso to section 10(2)(vii) of the Indian Income-tax Act.
2. Whether the consideration for the sale is the market value of the shares as on the date of the transaction, or the face value of the shares.

Issue-Wise Detailed Analysis:

Issue 1: Whether the transaction dated February 21, 1956, amounts to a sale within the purview of the second proviso to section 10(2)(vii) of the Indian Income-tax Act.
The primary question was whether the transaction constituted a sale, which would invoke the provisions of section 10(2)(vii) of the Income-tax Act, 1922. This section pertains to the computation of profits when a building, machinery, or plant is sold, discarded, demolished, or destroyed. The court examined the definitions of "sale" and "exchange" under the Transfer of Property Act and the Sale of Goods Act. It was emphasized that a sale involves a transfer of ownership in exchange for a price paid or promised, whereas an exchange involves a reciprocal transfer of ownership without the essential element of money consideration.

The court scrutinized the "exchange deed" dated February 21, 1956, and noted that the preamble and operative parts of the document explicitly referred to the transaction as an exchange. The consideration was not money but 5% tax-free cumulative preference shares, making it an exchange rather than a sale. The court highlighted that the valuation of Rs. 1,20,000 was for stamp duty purposes and did not alter the essence of the transaction. Thus, the transaction did not qualify as a sale under section 10(2)(vii), and the income-tax authorities were not entitled to treat it as such.

Issue 2: Whether the consideration for the sale is the market value of the shares as on the date of the transaction, or the face value of the shares.
Given that the transaction was determined to be an exchange and not a sale, the second issue regarding the consideration value became moot. However, the court still addressed the argument presented by the appellant. The appellant contended that the transaction was essentially a sale for Rs. 1,20,000, paid through the transfer of shares. The court rejected this argument, reiterating that there was no money consideration involved, and the transaction was an exchange.

The court also discussed the principle that in revenue matters, the substance of the transaction must be considered. However, in this case, there was no suggestion of bad faith or fraud, and the document was intended to be acted upon. The true principle is that the taxing statute must be applied according to the legal rights of the parties as embodied in the document. The court cited precedents, including the Duke of Westminster's case, to emphasize that the legal character of the transaction, as documented, must be respected.

Conclusion:
The court concluded that the transaction dated February 21, 1956, was an exchange and not a sale. Consequently, the provisions of section 10(2)(vii) of the Income-tax Act did not apply. The High Court's decision to answer the question in favor of the assessee-company was upheld, and the appeal was dismissed with costs.

Appeal dismissed.