Back
1976 Supreme(Cal) 372
High Court Of Calcutta
S. P. Mitra, S. C. Deb
COMMISSIONER OF INCOME-TAX - Appellant
Versus
GUEST KEEN AND NETTLEFOLD LTD. - Respondent
Income-Tax Reference 242 Of 1970
Decided On : 12/03/1976
B.L.PAL, D.PAL, PRABIR MAJUMDAR, Pronab Pal
The surplus realized on the sale of rights and rights shares was assessable as capital gains only, as the assessee's purpose in acquiring the rights shares was to retain control over the Indian company, and the sales of the shares were not part of a business.
Headnote:
INCOME TAX - Whether surplus realized on sale of rights and rights shares was assessable as business profit or capital gains - Held, surplus is to be treated as capital gains only.
Fact of the Case:
The assessee, a non-resident sterling company, had a controlling interest in an Indian company. It was offered rights shares by the Indian company, but did not have sufficient funds to purchase all the shares. The assessee obtained permission from the Government of India to transfer certain shares of another Indian company at a fixed price, and also took an overdraft from a bank. The assessee sold some of the rights shares to liquidate the overdraft. The Income-tax Officer assessed the surplus realized on the sale of the rights and rights shares as business income, but the Appellate Assistant Commissioner and the Tribunal held that it should be assessed as capital gains.
Finding of the Court:
The court held that the assessee's purpose in acquiring the rights shares was to retain control over the Indian company, and that the sales of the shares were not part of a business. Therefore, the surplus realized on the sale of the rights and rights shares was assessable as capital gains only.
Issues: Whether the surplus realized on the sale of the rights and rights shares was assessable as business profit or capital gains.
Ratio Decidendi: The court held that the assessee's purpose in acquiring the rights shares was to retain control over the Indian company, and that the sales of the shares were not part of a business. Therefore, the surplus realized on the sale of the rights and rights shares was assessable as capital gains only.
Final Decision: The court held that the surplus realized on the sale of the rights and rights shares was assessable as capital gains only.
( 1 ) THIS is a reference under Section 256 (1) of the Income-tax Act, 1961. The assessee is a sterling company. It has been assessed to income-tax as a non-resident. The assessment relates to the assessment years 1961-62 and 1962-63.
( 2 ) THE assessee had a controlling interest in M/s. Guest Keen Williams Ltd. of India. It had 14,10,600 ordinary shares of Rs. 10 each in the Indian company. The issued capital of the Indian company was divided into 20 lakhs ordinary shares of Rs. 10 each.
( 3 ) THE Indian company on May 13, 1960, applied for rights issues of capital at the rate of one share for each share held already by a shareholder.
( 4 ) THE assessee held certain shares in a company called Sankey Electrical Stamping Private Ltd. and wanted to transfer these shares to the Indian company. The Government of India gave approval to the transfer at a price of Rs. 165 per share.
( 5 ) THE Indian company was permitted to make the rights issue at Rs. 28. 50 as against the face value of Rs. 10. In other words, the shares could be issued at a premium of Rs. 18. 50.
( 6 ) IN view of the assessee's controlling interest as aforesaid the assessee had to keep in readiness a little over 4 crores of rupees to subscribe to the rights shares. The Government of India permitted the assessee to contribute to the rights issue by remittance of 11,25,000 less such sum as might be necessary to be paid as capital gains tax to the Indian Government as a result of the transfer of the shares by the assessee in Sankey Electricals. Certain other conditions were also imposed which are not strictly relevant for our purposes.
( 7 ) BY letter dated October 21, 1960, the Indian company wrote to the National and Grindlays Bank Ltd. , in Calcutta, on behalf of its principal, i. e. , the assessee before us, for an overdraft of rupees one crore for a period of 18 months from about November 15, 1960. The necessity for the overdraft was to meet the requirements of taking up the rights issue and also the capital gains tax referred to above. The Indian company in its letter to the bank suggested that the assessee would during the period of 18 months dispose of part of its holdings in the Indian company. The reason for having a period of 18 months for such disposal was that the assessee did not want to disturb the share market and adversely affect the interest of 11,000 shareholders. The Indian company also applied to the Reserve Bank of India for necessary permission. The loan was ultimately granted with the sanction of the Reserve Bank.
( 8 ) IN November, 1960, the Indian company on behalf of the assessee gave instructions to a firm of share brokers in Calcutta to sell one lakh rights out of the forthcoming entitlements at the best possible price. The share brokers agreed to sell the rights and sold a part of one lakh rights. The balance of the sale was stopped by the assessee. 4,25,000 shares had been kept as security with the National and Grindlays Bank Ltd. in connection with the overdraft account. The amounts realised as a result of the sale of a part of the shares were to be credited to the overdraft account which was done.
( 9 ) IT order to subscribe for the rights shares after the sale of 66,900 rights, the assessee found the necessary finance as per accounting which was done as follows :
Rs .
(1) Cash remittance from U. K. (8,75,000) 1,16,46,447 (2) Unutilised loan for the purchase of machinery 33,34,133 (3) Value of shares transferred to the Indian company at Rs. 165 per share 1,71,59,992 (4) Overdraft obtained from National & Grindlays Bank 78,65,679 Total 4,00,06,251
.
( 10 ) THERE was an exchange difference of Rs. 801 so that the net amount subscribed by the assessee totalled Rs. 4,00,05,450.
( 11 ) AT the time of assessment for the assessment years 1961-62 and 1962-63, a question was raised as to whether the surplus realised on the sale of the rights and the rights shares was assessable as a revenue-pro
