Soundararajan and Co. Pvt. Ltd. vs Commissioner of Income Tax

P. Thangavel, J.—At the instance of the assessee, the following question of law has been referred for the opinion of this court u/s 256(1) of

the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), in respect of the assessment year 1980-81 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the surplus of Rs. 58,995 resulting from the

transfer of 3,933 shares by the assessee to C. B. Muthuswamy Chettiar and Co., was the assessee''s capital gain resulting from the transfer of the

shares within the meaning of Section 2(47) of the Income Tax Act, 1961 ?

The assessee purchased 7,866 shares in Beena Roller Flour Mills (P.) Ltd., Thiruvalla. Kerala, from Gupta Group of Bombay at Rs. 65 per

share. In the meeting of the board of directors of the assessee-company, held on June 16, 1979, the abovesaid transaction was referred to, apart

from the further reference about the information given by the manager P. Subramania Pillai, to the board that there was an oral understanding with

C. B, Muthuswamy Chettiar and Co., to purchase 3,393 equity shares out of the abovesaid 7,866 shares. By letter dated June 26, 1979, C.B.

Muthuswamy Chettiar and Co., requested the assessee to adjust Rs. 3,14,640 for the value of the shares sold to them, out of Rs. 50,000 and Rs.

5,90,000 credited by them on June 11, 1979, in the assessee''s books. In the meeting of the board of directors held on July 29, 1979, it was

resolved that 3,933 equity shares of Rs. 100 each in Beena Roller Flour Mills Pvt. Ltd., out of 7,866 shares held by the assessee be transferred to

C. B. Muthuswamy Chettiar and Co., or their nominees for a consideration of Rs. 80 per share. A sum of Rs. 3,14,640 was debited towards

3,933 shares transferred to C. B. Muthuswamy Chettiar and Co. A sum of Rs. 58,995 representing the difference between the purchase price of

Rs. 65 and the sale price of Rs. 80 per share for the abovesaid 3,933 shares was credited to the capital reserve account of the assessee and the

same was also referred to in the directors'' report to the shareholders for the accounting year 1979-80.

The assessee represented that the abovesaid transferred shares were held by the assessee from the inception only on behalf of the said C. B.

Muthuswamy Chettiar and Co., and hence the abovesaid sum of Rs. 58,995 cannot be treated as short-term capital gain made by the assessee.

The Income Tax Officer rejected the abovesaid representation of the assessee and treated the said transfer as taxable turnover (sic).

Aggrieved by the abovesaid order of the Income Tax Officer, an appeal was preferred by the assessee before the Commissioner of Income Tax

(Appeals) and the said appeal also met with the same fate. While deciding so, the Commissioner of Income Tax (Appeals) had found that the

assessee was not the trustee of C. B. Muthuswamy Chettiar and Co., that there was no trust deed or written instrument evidencing the same and

that the surplus of Rs. 58,995 would constitute capital gain u/s 45 read with Section 2(47) of the Act. On further appeal, the Appellate Tribunal

concurred with the order of the Commissioner of Income Tax (Appeals) and further held that the reference made by the assessee to Section 82 of

the Indian Trusts Act will have no application and, therefore, the assessee is liable to pay tax on the short-term capital gain of Rs. 58,995.

It is under the said circumstances, the question of law set out above has been referred for the opinion of this court.

We have heard the submission on either side carefully. Admittedly, the assessee purchased 7,866 shares in the abovesaid Beena Roller Flour

Mills (P.) Ltd. at Rs. 65 per share. It is also not in dispute that the agreement dated May 27, 1979, between the assessee, the abovesaid Gupta

Group of Bombay and the abovesaid Beena Roller Flour Mills Pvt. Ltd., regarding the purchase of the abovesaid 7,866 shares by the assessee,

was approved in the meeting of the board of directors held on June 16, 1979. In the said meeting, the board of directors was also informed about

the oral understanding of C. B. Muthuswamy and Co., with the assessee to purchase 3,933 equity shares out of the abovesaid 7,866 shares. It is

equally not in dispute that the assessee wanted to take over the abovesaid concern with its associate the abovesaid C. B. Muthuswamy and Co.,

who had agreed to purchase half of the abovesaid shares, viz., 3,933 shares, at Rs. 80 per share and C.B. Muthuswamy and Co., had remitted to

its credit in the account of the assessee, a sum of Rs. 50,000 and Rs. 5,90,000 on June 11, 1979, and requested the assessee to adjust a sum of

Rs. 3,14,640 towards the value of 3,933 equity shares at Rs. 80 each and to retain the balance of Rs. 2,75,360 as their deposit, by means of a

letter dated June 29, 1979. The abovesaid matter was placed before the meeting of the board of directors of the asses-see-company on July 21,

1979, wherein it was resolved to transfer the abovesaid 3,933 equity shares to C. B. Muthuswamy and Co., or its nominee for a consideration of

Rs. 80 per share and to authorise M. Jayaram Pillai, the director of the company to take necessary steps for the transfer of the abovesaid shares.

As per the resolution of the board of directors 3,933 shares were transferred to Muthuswamy and Co., and the value of the abovesaid shares at

Rs. 80 each was adjusted from and out of the amount already credited by Muthuswamy and Co., in the account of the assessee-company. It is not

in dispute that the assessee had earned a profit of Rs. 58,995 because of the transfer of the abovesaid 3,933 shares. If the facts stated supra are

taken into consideration, it is clear that the contention raised on behalf of the assessee by learned counsel that the abovesaid amount has to be

treated as capital reserve and not as short-term capital gain, has been rightly negatived by the Tribunal.

Learned counsel for the assessee contended that the assessee was holding the abovesaid 3,933 shares on behalf of C. B. Muthuswamy and

Co., only as a trustee u/s 82 of the Indian Trusts Act and, therefore, the abovesaid transfer of the said shares would not mean a transfer u/s 45

read with Section 2(47) of the Act and that, therefore, the said sum of Rs. 58,995 would reduce the assessee''s cost and would not represent the

capital gain earned by them. A perusal of Section 82 of the Indian Trusts Act would reveal that where property is transferred to one person for a

consideration paid or provided by another person, and it appears that such other person did not intend to pay or provide such consideration for

the benefit of the transferee, the transferee must hold the property for the benefit of the person paying or providing the consideration. In this case,

there is no trust deed or any agreement in writing to the effect that the assessee was holding or purchased the abovesaid 3,933 shares as trustee for

Muthuswamy and Co. If the shares were purchased in trust by the assessee on behalf of Muthuswamy and Co., the shares ought to have been

transferred at Rs. 65 per share and not at Rs. 80 per share. As rightly contended by learned counsel for the Revenue, Muthuswamy and Co., had

not supported the contention raised on behalf of the assessee that the assessee acted as a trustee in purchasing and holding the shares, which were

transferred to Muthuswamy and Co. Therefore, the contention raised by learned counsel for the assessee that the abovesaid 3,933 shares were

purchased by the assessee in trust for Muthuswamy and Co., as per Section 82 of the Indian Trusts Act, cannot be sustained. In view of the

abovesaid conclusion, reliance placed by learned counsel for the assessee on section 88 of the Indian Trusts Act, 1882, with regard to the

advantage gained in a fiduciary character or on Section 94 of the said Act relating to constructive trusts in cases not expressly provided for, will

have no application to give any relief to the assessee in this case.

Since the assessee had gained a profit of Rs. 58,995 by means of the abovesaid transfer of 3,933 shares, the Appellate Tribunal has rightly

decided that it has to be taxed either as a revenue receipt and as a business income u/s 28 of the Act or as a short-term capital gain, treating the

same as purchase of shares and so as capital asset. It cannot also be treated as stock-in-trade as rightly decided by the Tribunal.

In fine, the question of law referred for the opinion of this court is answered in the affirmative and against the assessee. A sum of Rs. 1,000 is

awarded as costs to the Revenue.