TMI Blog1974 (8) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000. The Income-tax Officer, in the income-tax assessment for the assessment year 1960-61, relevant to the accounting year ending December 31, 1959, felt that the assessee was substantially interested in the company and applied the first proviso to section 12B(2) of the Indian Income-tax Act, 1922, hereinafter referred to as "the Act". and determined the fair market value of the 20 buses transferred to the company at Rs. 5,28,840 and brought a sum of Rs. 2,16,703 to tax as capital gains. This assessment was confirmed by the Commissioner of Income-tax under section 33A(2) of the Act. In the gift-tax assessment for the assessment year 1960-61, the Gift-tax Officer held that the difference between the fair market value of Rs. 5,28,840 and the actual amount received as consideration for the buses amounts to a gift under section 4(2) read with section 6 of the Gift-tax Act. He, therefore, levied gift-tax on Rs. 2,70,236. The assessee preferred an appeal to the Appellate Assistant Commissioner of Gift-tax contending that as he had the controlling interest in the company, he retained the same value of the buses even after they were transferred to the company, that there was no eleme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as separate transactions by both the parties as would be clear from the entries in the accounts of the company. Secondly, it is pointed out by the learned counsel that the allotment of the shares can only be for cash consideration in this case and, therefore, the Tribunal was in error in treating the 900 shares of the company allotted to the assessee as part of the consideration for the transfer of buses. Thirdly, it is contended that even if the transfer of buses and the allotment of shares are treated as forming part of a single transaction, the view of the Tribunal that the real value of 900 shares will be 90 per cent. of the real value of the buses transferred cannot at all be sustained as the real value of the shares of the company has to be determine a ter providing for all debts due by the company and that in this case admittedly the company was due to the assessee in a sum of Rs. 1,83,133. Before dealing with the above contentions it would be useful to refer to certain facts which are quite, material. The written-down value of the 20 buses transferred by the assessee to the company in his books on the date of the transfer was Rs. 2,58,604. The transfer is admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 133 or whether the transfer was for a cash consideration of Rs. 2,58,604. Secondly, it has to be seen whether the consideration for the transfer, whatever it be, is adequate. The statement of the case proceeds on the bask that there was a transfer of 20 buses by the assessee to the company for a total consideration of Rs. 2,58,604 on July 1, 1959, and in fact the said amount stood credited to the assessee in the company's books and it is later that the assessee's account had been debited with a sum of Rs. 90,000 being the value of the 900 shares allotted to the assessee by the company. If really the consideration for the buses comprised of the value of 906 fully paid up shares plus a cash of Rs. 1,83,133 as has, been assumed by the Tribunal, one would have expected a credit entry in favour of the assessee in the company's accounts only for Rs. 1,83,133 and not Rs. 2,58,604. The entries in the company's accounts wherein the total consideration of Rs. 2,58,604 has been credited in favour of the assessee and later he has been debited with a sum of Rs. 90,000 being the face value of the shares allotted to him, prima facie, show that the transfer of the buses and the allotment of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, as might be necessary to bring the total periodical payments while be was still in the service of the employer up to the amount of the salary or wages which he had lately been receiving. The employees acknowledged the said letter. It was found that the employees were in fact getting the amounts which they respectively would have received as wages or salaries if they lived during the period and continued in their employment. The question arose as to whether the payments made to his employees under the deeds could be said to be payments of salary or wages or whether they were annual payments from which the income-tax was deductible and as such admissible deductions in computing the assessee's income for surtax purposes. It was contended for the revenue that in addition to the deed there is another collateral contract between him and the employees to the effect that the employer would still serve him in consideration of a salary or wage equal to the salary or wage he was receiving before the deed was executed and that he will accept what he receives under the deed in part satisfaction of his salary or wage and that, therefore, the annuity so long as the employee remains in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual transaction is to be disregarded as 'machinery' and that the substance or equivalent financial results are the relevant consideration. It may indeed be said that if these loose principles of construction had been liberally applied, they would in many instances have been adequate to deal with tax evasion and there would have been less frequent cause for the intervention of Parliament." In Commissioners of Inland Revenue v. Fleming Co. (Machinery) Ltd. a company carrying on business as manufacturers' agents were sole selling agents for certain products of a manufacturer from 1903. But the sole selling agency was terminated by an agreement in 1948 under which the company received, inter alia, a payment as compensation for the loss of the agency. The question arose as to whether the said compensation was a capital receipt or a trading receipt. Lord President (Cooper) felt that if the attention is concentrated upon the substance of the transaction, the payment should be treated as capital payment whereas if attention is concentrated on the form of the payment, the transaction should be treated as a trading payment and proceeded to say : "... it is not legitimate to look behi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in the above decisions. But what he contends is that the transaction between the assessee and the company not having been reduced to writing its nature has to be gathered from the surrounding circumstances, that the revenue is not justified in relying only on the entries in the accounts of the company ignoring the true nature of the transaction, that the mere entries in the accounts of the company will not prove an earlier sale of the buses by the assessee to the company and then a later allotment of the shares by the company to the assessee, that both the transfer of buses and the allotment of shares form part of the same transaction, that the allotment of shares by the company to the assessee cannot be dissociated from the transfer of buses, and that the bargain between the company and the assessee was that in lieu of the transfer of buses by the assessee he will get from the company 900 shares as also a cash consideration of Rs. 1,83,133. It is also contended for the assessee that the Tribunal having given a finding that the transfer of buses to the company and the allotment of shares to the assessee formed part of a single transaction, that finding of fact has to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up, and the consideration for which they have been allotted ; ........" The following proviso was added to section 75(1)(a) by the Companies (Amendment) Act, 1965 : "Provided that the company shall not show in such return any shares as having been allotted for cash if cash has not actually been received in respect of such allotment." This proviso specifically imposes a duty on the promoters and directors of a company to ensure that the share capital reflects cash or other valuable assets and is not supported by merely book adjustments. Section 75(1)(b) enjoins on the promoters or the directors of a company in the case of shares allotted otherwise than for cash to produce before the Registrar of Companies the contract in writing setting out the consideration other than cash in respect of which the allotment was made. Admittedly, in this case there is no contract between the company and the assessee under which the company has undertaken to allot shares to the assessee in lieu of the transfer of his buses to the company. It is not the case of the assessee that section 75(1)(b) had been complied with. Of course the proviso to section 75(1)(a) which came to be introduced in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responding shares for cash, he and the company exchanging cheques, or relying on a set-off without the formality of an exchange of cheques. That this amounted to an issue for cash was established by Spargo's case." In Spargo's case a company at its first meeting resolved that a certain sum be credited to one Spargo for the lease of a mine, and that the sum be paid out of the share capital of the company by issuing to him certain shares for which he had subscribed in the memorandum of association as fully paid up. But, on the date of the resolution, Spargo had only a verbal agreement with the parties who were equitably entitled to the lease of the mine, which was afterwards put into writing. The company subsequently made agreement with Spargo and the other parties on the footing of that agreement. But in consequence of some difficulties as to the form of the lease it was never executed. Upon the winding up of the company it was contended that the transaction between the company and Spargo was equivalent to an exchange of cheques and, therefore, a cash payment by him and consequently it was not a contract required to be made valid by registration under section 25 of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as to whether the shares were rightly credited as paid in full under the provisions of article 4722 of the Revised Statutes of Quebec. The Privy Council found on the evidence that there was an agreement on the part of the promoters to take so many shares presently payable in cash, and an independent agreement by the company to purchase the property for so much money down and that the facts attracted the principle of Spargo's case and stated : "Their Lordships are not prepared to dissent from the decision in Spargo's case. It is a decision of the highest authority. It was pronounced by James and Mellish L. JJ., and the view which those eminent judges expressed had, as appears from their judgments, the approval of Selborne L.C." In Thodapuzha Rubber Company Ltd. v. Registrar of Joint Stock Companies, Madras, a Division Bench of this court had to consider the scope of the expression "as fully paid up otherwise than in cash" occurring in section 104(1)(b) of the Indian Companies Act, 1913. In that case there was an allotment of a fully paid up share to a debenture-holder in exchange of his debenture pursuant to a condition in the debenture deed. The question arose whether such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) cannot be applied. The court also observed that the presence of money consideration is an essential element in a transaction of sale and that if the consideration is not money but some other valuable consideration, it may be an exchange or barter but not a sale. But, on the facts of this case, the transaction between the company and the assessee cannot be treated as an exchange or a barter, for the company cannot own or sell its shares. In the above two cases the Supreme Court treated the transactions as either an exchange or a barter in view of the fact that the assets were exchanged for shares. But, in this case, the assessee had transferred buses for money consideration, which had been paid partly in cash and partly in shape of shares, and the accounts of the company show that the parties themselves treated the transfer of shares as one for price and the allotment of shares by the company also for cash. As per the principle in Spargo's case the allotment of shares was for discharging the company's liability for payment of the consideration for the buses. That means the company should be deemed to have allotted the shares for cash and the value of the shares due from the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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