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1930 Supreme(SC) 14
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD BLANESBURGH, LORD WARRINGTON OF CLYFFE, AND SIR CHARLES SARGANT.
TRUSTEES CORPORATION (INDIA) LIMITED - Appellant
Versus
COMMISSIONER OF INCOME-TAX, BOMBAY PRESIDENCY - Respondents
On appeal from the High Court at Bombay.
Decided On : Jan. 30. 1930.
Solicitors for appellants:E. F. Turner & Sons. Solicitor for respondent: Solicitor, India Office.
For tax purposes, the purchase price of an asset acquired via the issuance of shares is the objective real value of those shares at the time of issue, not their nominal value, as a company is not a debtor to its capital.
Headnote:(A) Indian Income-tax Act, 1922 - Section 66 - Valuation of shares issued as consideration for acquisition - Whether nominal value or real value to be considered for determining loss - For the purpose of calculating profit or loss for tax assessments, the objective real value of shares at the time of issue is the relevant criterion, not the nominal value credited to them. (Paras 30-32)
(B) Company Law - Liability to Capital - A company is not a debtor to its capital; the amount credited upon a share determines the proportion of profits or surplus assets but does not make the company a debtor for any sum. (Para 32)
(C) Interpretation of Precedents - Principles relating to the liability of a shareholder to a company in liquidation regarding shares issued as fully paid are distinguishable from the objective valuation of shares for tax purposes. (Paras 29-31)
Facts of the case:
An entity acquired a block of shares in another company in consideration for the issue of its own shares credited as fully paid. The agreements were structured such that the sellers retained dominion over the acquired shares, including the right to pledge and sell them. Ultimately, the shares were realized for a sum significantly lower than the nominal value of the shares issued by the acquiring entity. The acquiring entity claimed a loss for tax purposes based on the nominal value of the shares it had issued, rather than their actual intrinsic value at the time of allotment.
Findings of Court:
The transaction was found to be illusory and not a genuine purchase and sale. The nominal value of the shares issued did not represent the actual expenditure or the objective value of the shares at the time of allotment.
Issues: Whether the tax authority was bound in law to take the nominal value of the shares allotted by the company as the price paid for the acquired shares.
Ratio Decidendi: The court held that the nominal value of shares issued as fully paid does not create a debt owed by the company to the shareholder. Therefore, for the purpose of determining a loss on realization, the real objective value of the shares at the date of issue must be used. Precedents regarding the inability of a company to call on fully paid shares do not mandate the use of nominal value for tax valuations, as the issue is one of objective valuation for revenue purposes rather than shareholder liability.
Result: Appeal dismissed with costs.
Legal Category Hierarchy
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taxation
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income tax
- super-tax
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income tax
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company law
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share capital
- valuation of shares
- issue of shares at discount
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share capital
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practice and procedure
- statutory reference
Judgement
Appeal (No. 36 of 1929) from a decree of the High Court dated March 5, 1928, upon a reference to that Court by the Commissioner of Income-tax, Bombay, under s. 66 of the Indian Income-tax Act, 1922.
The reference was made under an order of the High Court in the circumstances stated in the judgment of the Judicial Committee.
The first of the three questions ultimately referred, which was alone the subject of the present appeal, was " Whether the Commissioner of Income-tax was not bound in law to take as the price paid for the Burma Corporation shares the nominal value of the shares allotted by the petitioner company in payment therefor." The Commissioner was of opinion that the question should be answered in the negative. He found that the value of the appellant companys shares when allotted was not more than Rs.98.
The High Court answered the above question in the negative. The learned judges (Marten C.J. and Kemp J.) were of opinion that In re Wragg ([ 1897] 1 Ch. 796.) was distinguishable, and that it was open to the Court to ascertain the true value, which was not more than Rs.98, and that there had been no loss to the appellant company from the transaction. In answer to a second question referred the High Court was of opinion that if there had been a loss it would be a loss of revenue not of capital.
1929. Oct. 28, 31 ; Nov. 1. Latter K.C. and C. W. Turner for the appellants. The appellant company could not lawfully issue its shares at a discount, consequently the price paid by the company for the Burma shares must be taken as being not less than the nominal value of the shares allotted In re Wragg ([ 1897] 1 Ch. 796.) That decision related to the liability of a shareholder to the company in liquidation, but the same principle applies in considering profits for purposes of income-tax or super-tax Inland Revenue Commissioners v. Blott ([ 1921] 2 A. C. 171.); Inland Revenue Commissioners v. Fishers Executors . ([ 1926] A. C. 395.) The question of the price is one of law not of fact Craig (Kilmarnock) v. Cowperthwaite. (( 1929) 13 Tax Cases, 628.) Even if the nominal value of the allotted shares is not conclusive in law, the Commissioner was wrong in taking the value of the allotted shares at Rs. 98, because the agreement of 1923 by halving the number of shares to be allotted doubled the value of those allotted. That was an error of law appearing upon the case stated, and the Court was bound to take notice of it Knight v. Halliwell . (( 1874) L. R. 9 Q. B. 412.) The Commissioner having wrongly directed himself in law his finding is open to review Ducker
v. Rees Roturbo Development Syndicate. ([ 1928] A. C. 132.) [Reference was made also to Ooregum Gold Mining Co. v. Roper . ([ 1892] A. C. 125.)]
Dunne K.C. and Reginald Hills for the respondent. Having regard to the position of the parties to the agreement and the terms of the agreements there was no real contract of purchase and sale; there was no evidence that the market value of the Burma shares was considered in fixing the
Law. Rep. 57 Ind. App. 152 ( 1929- 1930) Trustees Corporation v. Commissioner of Income-Tax
24
consideration. The Commissioner rightly found that the transaction, regarded as a purchase, was colourable and illusory. Consequently In re Wragg ([ 1897] 1 Ch. 796.) does not apply, and the first question was rightly answered in the negative. No further question arises, as the only question relating to the purchase price referred under s. 66, was whether the nominal value of the allotted shares had to be taken. Apart from that contention of law, the value of the allotted shares regarded as the price was a question of fact, and the finding of the Commissioner is binding. Whether a profit or loss has been made is in all cases primarily one of fact depending upon ordinary business considerations Sun Insurance Office v. Clark . ([ 1912] A. 0. 443, 455.) Latter K.C. replied.
1930. Jan. 30. The judgment of their Lordships was delivered by
LORD BLANESB
