Income must be real and tangible, and the substance of the transaction should be considered over its form.

( 1 ) AT the instance of Revenue the Income-tax Appellate Tribunal, Bangalore Bench (hereinafter referred to as 'the Tribunal') has referred the following question of law for our opinion under section 256 (1) of the IT Act (for short hereinafter referred to as 'the Act') : whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that although the assessee is a financial company dealing in shares etc. , the transactions of purchase of its own debentures through its nominees did not represent transactions involving its stock-in-trade and accordingly, in holding that the surplus arising from issue and repurchase of the debentures merely represented a capital receipt not subject to tax ?

( 2 ) THE facts leading to this reference are as under :

The assessee-company is engaged in the business of acting as a finance company dealing inter alia, in securities, debentures, shares, etc. and also granting loans and advances to other parties.

In the year 1973, the assessee company had issued large number of debentures of Rs. 10 each at par. These debentures were redeemable during the accounting years corresponding to asst. yrs. 1984-85, 1985-86 and 1986-87 at the rate of 30 per cent, 30 per cent and 40 per cent, respectively of the face value thereof. During the period of. redemption, the assessee-company purchased some of these debentures through a nominee at a price less than the face value thereof. The assessee credited the difference amount between the face value of the debentures purchased and the cost thereof in its books as surplus arising on redemption of debentures. The figures of such surplus credited to the Pandl a/c for the three years. e. , asst. yrs. 1984-85, 1985-86 and 1986-87 were Rs. 80,815, Rs. 82,171 and Rs. 1,09,650, respectively. Although the assessee credited these amounts to Pandl a/c, did not form part of the income by way of capital gains receipt and hence sought for deductions of the amount from computation of the income. The AO concluded that the surplus amounts held by the nominees of the assessee on behalf of the assessee-company constituted its revenue receipts and should therefore be included within its business income. Accordingly, he did not allow the deductions claimed by the assessee. In first appeal, the appellate authority held the act of redemption actually took place through book entries only and therefore as the assessee was a financial company dealing inter alia, in securities, debentures, shares, etc. and was engaged in repetitive transactions of buying and selling of such commodities, purchase of debentures through its nominees should be considered as business transaction on revenue side and therefore it is a gain arising therefrom and becomes part of the regular income of the assessee and accordingly dismissed the appeal. In the second appeal, the Tribunal held that the debentures of the company could not be considered to form a part of its stock-in-trade. The purchase and sale of its own debentures was not permissible in law and hence it was not possible to consider the assessee-company as having attempted to make a business out of the purchase and sale of the said debentures. The issue of debentures initially meant receiving of loan from the debenture-holders and that by repurchasing of the debentures, before their redemption at discount, a portion of the loan to be refunded by the company was merely cut down. The loan which is ultimately not required to be paid certainly constitutes a gain in the hands of the debtor, but such transaction will not result in any revenue gain. The gain is merely of the nature of capital receipt. Though the assessee might have credited the surplus amount to its Pandl a/c for the three years, if the Department wanted to stick to its version that the gain out of the transaction arose from repurchase of debentures, such gain should have been assessed to tax actually in the years of repurchase. Therefore, the Tribunal