A transaction that does not result in real profits is not liable to income tax.

1. The question that arises on this reference is whether the assessee made any profit or gain by a transaction the effect of which was to transfer shares of 20 joint stock companies to a limited company called Homi Mehta and Sons Ltd. Sir Homi Mehta admittedly dealt in shares both ready and forward, and at the material date he, jointly with his sons, held shares in 26 companies including 20 companies with which we are concerned on this reference, and the cost price of these shares was Rs. 30,45,017/-.

The assessee "floated a private limited company with a capital of Rs. 60,00,000/-, and to this company he transferred several businesses in which he had a share and interest and also shares of 26 joint stock companies and the interest of Sir Homi Mehta in various businesses was valued at Rs. 23,08,281-11-0, the value of the shares of 26 joint stock companies was Rs. 40,97,000/- being their market value at the date of the transfer aggregating to Rs. 69,05,281-11-0.

It appears that Sir Homi Mehta had an overdraft account with a Bank and he had to pay to the Bank a sum of Rs. 9,05,281-11-0. The newly formed company agreed to take over this liability and discharge it, and, therefore the total after deducting this sum of Rs. 9,05,281-11-0 came to Rs. 60,00,000/-. This amount was paid, as it were, to Sir Homi Mehta, by allotting to him 6000 fully paid up shares of this company of the face value of Rs. 1000/- each. Sir Homi Mehta did not take all these 6000 shares to himself. He took 5600 shares and at his direction the remaining 400 shares were divided between his four sons, each getting a 100 shares.

2. The contention of the department was that Sir Homi Mehta sold shares of these 26 joint stock companies to this limited company for Rs. 40,97,000/-, that these shares cost him Rs -30,45,017/-. The result was that he made a profit of the difference between Rs. 40,97,000/- and Rs. 30,45,017/-i.e., roughly between Rs. 10 lacs and Rs. 11 lacs, and this amount was liable to tax.

3. When the matter came before the Tribunal it took the view that only shares of 20 companies were the stock-in-trade of Sir Homi Mehta and therefore the only question that fell to be considered was the alleged profit made by Sir Homi Mehta on the transfer of these shares to the private limited company. On this question before the Tribunal the President and the Accountant Member differed.

The President took the view that the amount was Income within the meaning of the Act and liable to tax. The Accountant Member took a different view. The matter was therefore referred to the Judicial Member and the Judicial Member agreed with the Accountant Member and the Commissioner of Income-tax has now come on this reference.

4. It is a trite saying that in income-tax matters one must look at the real nature of the transaction. Whatever legal or technical form a transaction may take, the Court must try and determine what the real transaction was and not the form which the transaction took. It is equally true to say that a transaction for the purposes of income-tax must be looked at from a commercial point of view.

In dealing with commercial men in income-tax matters we must try and understand what is the real commercial result of a particular action taken by a commercial man. Equally so, in trying to determine whether a certain transaction resulted in profits, we must come to a conclusion that the transaction resulted in real profits, profits which from the commercial point of view meant a gain to the person who entered into the transaction, not profits from any narrow, technical or legalistic point of view.

5. If we approach this matter from that point of view, the case really does not present very serious difficulties. We will now concern ourselves only with the shares of these 20 joint stock companies, ignoring for the moment the other items which were transferred by Sir Homi Mehta to the limited company. Sir Homi Mehta owned these shares jointly with his sons.

The res