MOTORS AND GENERAL STORES PRIVATE LIMITED BOBBILI Vs. COMMISSIONER OF INCOME TAX ANDHRA PRADESH HYDERABAD

JUDGEMENT

(1.) The income tax appellate Tribunal, Hyderabad , has stated a case as directed by this court under section 66(2) of the Indian Income Tax Act, 1922, in I. T. C. M. P. No. 5478 of 1961, on the following questions, namely : (1) Whether the transaction dated 19-9-1956 amounts to a sale within the purview of the second proviso to section 10(2) (vii) of the Indian Income tax Act ? Alternatively: Whether the consideration for the sale is not the market value of the shares as on the date of the transaction, namely Rs. 95.00 per share, but the face value of the shares.

(2.) The assessment with respect to which the reference has been made is for the year 1956-57 relating to the accounting period of 1955-56. The facts as set out by the Tribunal in the statement of the case is that the assessee is a private limited company, a cinema house from which it was deriving income by exhibiting films. In a meeting of the Board of Directors held on 9-9-1955, it was resolved that the Managing Director, the Raja of Bobbili, may be authorized to negotiate with the Zamindar and the Zamindarini of negotiate with the Zamindar and the Zamindarini of Chikkavaram and or their nominees for sale of the entire concern known by the name of Sri Rama Talkies, Bobbili, with all its equipment, machinery, fittings spares, accessories, the old projector, the jeep car bearing No. MSP 928 purchased from its funds, all the buildings and out-houses, wither newly constructed or mentioned in the registered sale deed No. 1464/ 5-9-1949 together with the entire premises covered thereby and the cash deposits lying with the various distributors and the Commercial Tax Department of the State Government and also the good will of the concern for a consideration of Rs. 1, which amount was to be received in the shape of transfer of 5% tax free cumulative Preference shares of M/S. Sri Rama Sugars and Industries Ltd., Bobbili, of the face of Rs. 1,20,000.00 held by Srimathi Rani Ravu Saraswathi Devi Varu, wife of Raja R. J. K. Rangarao Bahadur Varu, Zamindarini of Chikkavaram. This resolution of the Board of Directors was later confirmed on 4-10-1955, in pursuance of which the property mentioned aforesaid was conveyed by a deed, known as the deed of exchange dated m21-2-1956 in consideration of the transfer of 5% cumulative preference shares of M/s. Sri Rama Sugars and Industries Ltd., Bobbili of the face value of Rs. 1,20,000.00 owned by the Zamindarini of Chikkavaram. It was further stated that the assessments books showed a profit of Rs. 9, 82 3.00 on account of the said transaction, which was treated by the assessee as a capital receipt and was shown in section D of the return of its income. The Income tax Officer, however, after taking into consideration the various items, assessed the total value of the assets transferred at Rs. 76,432.00 While doing so, he took into consideration the written down value of the depreciable assets comprised in the aforesaid transfer and thus computed the profits under section (10(2) (vii) of the Act at Rs. 43,568.00 and added this to the income of the assessee. The assessee appealed to the appellate Assistant Commissioner and contended firstly, that the sale of the cinema concern is only a realisation of assets and as such the excess realised cannot be treated as profits liable to tax; secondly, that the good will was not allowed and thirdly, that it is incorrect for the Officer to treat the face value of the shares as the sale price while the market value of such shares is by far less. In the supplementary grounds of appeal, it was urged that the Income-tax officer was not right in deducting from the written down value the initial depreciation allowed on the machinery and the building in the first year, and that the property in the cinema was only exchanged for shares in a limited liability company and that the transactions did not amount to a sale and as such fell outside the purview of S. 10(2) (vii) of the Act. The Appellate Assistant Commissioner rejected all these contentions and held that on the terms of the resolution and of the deed dated 21-2-1956, the transaction was a sale and not an exchange as sought to be made out by the assessee. he also rejected the plea of the assessee. He also rejected the plea of the assessee that in computing the profits. allowance, should be made on account of the good will which was the subject matter of the transfer. The claim of the assessee that while computing the profits the market value of the shares should be taken into consideration was also rejected by him as according to him, what was purported to be the consideration was the value of Rs. 1,20,000.00 of the assets in lieu of which the assessee agreed to accept shares worth Rs. 1,20,000.00 as such, the consideration amounted to Rs. 1,20,000.00 the assessee thereafter appealed to the Tribunal, which rejected similar pleas taken before it by the assessee except for allowing a sum of Rs. 5000.00 as representing the cost of the good will.

(3.) It is trite law that the nature of an instrument should be regarded not so much by the description of the document given therein by the parties but on what the real nature of the transaction is. In other words, the real and true meaning of an instrument should be ascertained irrespective of the description given to it in the instrument by the parties, even though the parties may have believed that its effect and operation was something quite different to what in effect the document is purported to achieve. If, in truth and in effect, the parties intended to execute a sale deed but the nature of the transaction is an exchange, or if they intended to effect an exchange but in fact the document purports to be a sale deed, effect must be given to the instrument and not to the alleged or purported intention of the parties, the case law particularly in respect of stamp duty to be levied is replete with instances where this principle has been given effect to. The legal nature of a document, therefore, must be determined by its contents and not by its description and no extrinsic evidence , dehors the instrument, would be admissible except in certain limited cases, to determine the nature of that document or of the transaction.