1972 (10) TMI 13 - HC - Income Tax

Whether on the facts and in the circumstances of the case the sums of Rs. 4, 38, 472 and Rs. 2, 27, 342 were properly held to be capital profits

Summary

Issues:
Determination of whether sums of Rs. 4,38,472 and Rs. 2,27,342 were properly held to be capital profits.

Analysis:
The case involved a reference under section 66(1) of the Income-tax Act, 1922, regarding the assessment years 1952-53 and 1953-54. The assessee, a private limited company, was involved in the import and sale of diesel engines. The company presented a scheme to the Government of India in 1947 for manufacturing diesel engines in India with machinery from a financially troubled American company. The project involved significant remittances to America and the establishment of a new company in India. However, the project was abandoned in 1949 due to unsuitability of the engines for Indian conditions. Subsequent remittances led to surplus realizations of Rs. 4,38,472 and Rs. 2,27,342 in the relevant years, which were initially taxed by the Income-tax Officer.

The Appellate Assistant Commissioner and the Income-tax Tribunal later held that the profits from the liquidation of investments and remittances were capital gains and not taxable. The revenue contended that the transaction was a trading activity, emphasizing the low value of fixed assets of the American company and the loan given by the assessee-company. However, the Tribunal found the transaction to be of a capital nature, as the purchase of shares did not constitute trading activity, and the profits from liquidation were capital gains.

The Tribunal concluded that the remittances were not revenue income, even after selling shares, as the amounts repaid were less than the principal. The revenue did not argue that the sums were related to the sale of stock-in-trade. The composite nature of the transaction, aimed at establishing a diesel engine manufacturing company, was deemed capital in nature. Therefore, any gains resulting from the project's abandonment were considered capital gains, not revenue income.

In summary, the court affirmed that the sums of Rs. 4,38,472 and Rs. 2,27,342 were properly held to be capital profits, and the revenue was directed to pay the costs of the assessee-company.