JUDGMENT
S.N. Jha, J.
1. This court, by an order dated January 29, 1973, on an application under Section 256(2) of the I.T. Act, 1961 (hereinafter referred to as ” the Act “), directed the Income-tax Appellate Tribunal, Patna Bench, Patna, to state a case on the following question of law :
“Whether, on the facts and in the circumstances of the case, the entire sum of Rs. 1,94,299 could be treated and taxed, in law, as a capital gain of the assessee. ”
2. In pursuance of that order, the Income-tax Appellate Tribunal, Patna Bench, Patna, drew up a statement of case and referred it to this court on the question of law mentioned above.
3. In order to answer the question, referred to above, it is essential to state some facts, which are very much relevant and material on the point in question. The petitioner is the karta of an HUF. This HUF held certain shares of the Pacific Bank of India Ltd., Calcutta, in the names of various members of the family. The details of these shares are as follows:
Rs.
1.
2,000 preference shares in the name of Rai Bahadur Dalip Narain Singh @ Rs. 100 per share
2,00,000
2.
Ordinary shares for Rs. 2,501
2,501
3.
One lakh ordinary shares of Re. 1 in the name of Smt. Muneshwari Devi, W/o Shri Raghubar Narain Singh
1,00,000
4.
2,632 preference shares of Rs. 100 in the name of Shri Raghubar Narain Singh
2,63,200
Total
5,65,701.
4. Before this petitioner, the father of the petitioner, Rai Bahadur Dalip Narain Singh, was the karta. For the assessment year 1947-48, the ITO, Monghyr, assessed Rai Bahadur Dalip Narain Singh as karta along with his son, Raghubar Narain Singh, the petitioner, on an income of Rs. 29,884. Subsequently, there was a partition in the family between Rai Bahadur Dalip Narain Singh and the petitioner, which was accepted by the ITO, Monghyr. Rai Bahadur Dalip Narain Singh died on January 6, 1951. In the year 1964, the ITO reopened the assessment for the year 1947-48 and after obtaining sanction from the Central Board of Revenue, Delhi, under two heads; namely :
(a) that four lakhs of rupees escaped assessment for the year 1947-48.
(b) that there was also a capital gain during the year 1947-48 which escaped assessment.
5. Notices were issued to the petitioner under Section 148 of the Act by the ITO, Special Circle, Patna, asking the petitioner to file fresh return regarding the income which had escaped assessment. The petitioner filed a fresh return of Rs. 29,884 in pursuance of the said notice, but the ITO, on the date fixed, intimated the petitioner that four lakhs rupees was income from undisclosed sources in the transaction between the assessee-petitioner and Shri A. K. Das regarding the transfer of Pacific Bank shares and the management and there was also a capital gain of Rs. 1,94,299 arising out of such transfer of shares and the management to Shri A. K. Das.
6. It was submitted before the ITO by the assessee that the fixed deposit was arranged by Shri A. K. Das who purchased the shares of the petitioner and his family members for Rs. 7,60,000. This was disbelieved by the ITO who added Rs. 4,00,000 as income fr6m other sources. Thereafter, the ITO computed the capital gain on the sale of shares in the hands of the assessee-petitioner. He deducted the cost on shares of Rs. 5,65,701
from the sale proceeds of Rs. 7,60,000 and, thereafter, computed the capital gain at Rs. 1,94,299, which is the subject-matter of dispute in this referehce. We are not concerned in this reference with the above four lakhs as income from other sources. The only question referred before us is whether, on the facts and in the circumstances of this case, the entire sum of Rs. 1,94,299 could be treated and taxed as a capital gain of the assessee-petitioner. Before answering this question, it is relevant to mention that the order of the ITO was upheld by the AAC, on appeal and the petitioner’s appeal was dismissed. For this, certain facts regarding Pacific Bank of India Ltd. are more or less admitted. The petitioner was the managing director of the Pacific Bank of India Ltd. with its head office at Calcutta, during the asssessment year 1947-48. The family of the petitioner held shares of the Pacific Bank of India Ltd. to the extent of Rs. 5,65,701 in the following manner:
(i) Rs. 2 lakhs face value preference shares plus Rs. 2,501 face value ordinary shares in the name of Rai Bahadur Dalip Narain Singh;
(ii) Rs. 2,63,200 face value preference shares in the name of Raghu-bar Narain Singh;
(iii) Rs. 1 lakh face value ordinary shares in the name of Smt. Muneshwari Devi, wife of Raghubar Narain Singh.
7. It was agreed between the petitioner’s family and Shri A. K. Das that all the shares which the family possessed would be transferred to Shri A. K. Das and the petitioner would resign from the office of managing director and the price for the transfer of shares and resignation of the petitioner’s office of the managing director was fixed at Rs. 7,60,000. Shri A. K. Das agreed to this and the sum of Rs. 7,60,000 was paid.
8. The Income-tax Appellate Tribunal, while considering this question, gave a finding that the price received by the petitioner was the price for the sale of the shares and not the price for delegating the power of the office of managing director, because even if it is assumed that the petitioner delegated the power to Shri A. K. Das, he was not the competent authority under the Indian Companies Act to delegate such power to Shri Das. According to the Income-tax Appellate Tribunal, the power could be delegated only by the directors and with the approval of the shareholders in the general meeting. On these findings, the Income-tax Appellate Tribunal came to the conclusion that the capital gains of Rs. 1,94,299 was properly computed by the authorities.
9. The learned counsel appearing on behalf of the assessee-petitioner contended that the finding of the Income-tax Appellate Tribunal is erroneous in law. He submitted that the entire amount of Rs. 1,94,299 could not be treated and taxed, in law, as a capital gain arising out of the
sale proceeds of the shares only. In this connection, he has drawn our attention to the copy of agreement dated April 3, 1946, which is annex.-B to the statement of case referred to by the Income-tax Appellate Tribunal.
10. ” Capital gdin ” has been denned in Section 12B of the Indian I.T. Act, 1922 (hereinafter referred to as ” the old Act “). Section 12B says that the tax shall be payable by an assessee under the head ” Capital gains ” in respect of any profits or gains arising from the sale, exchange, relin-quishment or transfer of a capital asset. Sub-section (2) of Section 12B deals with the computation of the amount of a capital gain, after making certain deductions from the ‘ full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made. There are certain other provisos in this section, but we are not concerned with that part. Sub-section (2) of Section 12B says that any expenditure incurred solely in connection with such sale and the actual cost to the assessee of the capital asset including any expenditure of a capital nature incurred or borne by him shall be excluded from the sale proceeds while computing the capital gains of an assessee.
11. The agreement, annexure B, between the petitioner as ” the first party ” and Ajit Kumar Das as ” the second party ” which I have referred earlier, shows that whereas the first party holds in his name and in the name of his father and wife preference, deferred and ordinary shares in the Pacific Bank of India Ltd. to the extent of about Rs. 6 lakhs and is also chairman of the board of directors of the said bank with powers set in the power of attorney executed by the said bank in favour of the first party and whereas by virtue of his powers and authorities vested in him, the first party is competent to appoint such person or persons, as he may think fit, for the better and efficient management of the affairs of the said bank and to delegate to him such power or powers as may be necessary for this purpose and whereas the first party being desirous of disposing of his shares approached the second party who had agreed not only to take over the said shares but also the management of the affairs of the said bank. It was agreed by and between the parties that in consideration of the sum of Rs. 7,60,000 paid by the said second party, the said first party shall also appoint the said second party as the general manager of the said Pacific Bank of India Ltd. and will delegate to him such power or powers that were vested in the said first party for the purpose of carrying on business of the said Pacific Bank of India Ltd, From a perusal of annexure B (deed of agreement), it is manifest that the consideration amount of Rs. 7,60,000 does cover not only the value of the shares held by the assessee but also the consideration for the transfer of the office of the managing director, which was previously held by the petitioner. The word ” income ” which has been defined in Sub-section (6C) of Section 2 of the old Act includes also the value of any benefit or perquisite, whether convertible into money or not obtained from a company, either by a director or by any other person, who has a substantial interest in the company. Therefore, any benefit received from the transfer of the office of the managing directorship can be included in the income of any person. In this connection, the learned counsel appearing on behalf of the petitioner referred to a decision in Baijnath Chaturbhuj v. CIT [1957] 31 ITR 643 (Bom). In that case, a firm purchased the managing agency rights and 4,736 shares held by another firm in a certain company for a consideration of Rs. 7,51,000 in the year 1938. In 1946, this firm sold to a third party 65,012 shares held by it in the company together with its managing agency rights for an amount calculated at Rs. 65 per share. The income-tax authorities, for the purpose of computing capital gains under Section 12B of the old Act, held that the full value of the consideration for the sale of shares must be taken to be Rs. 65 per share while the contention of the assessee was that the full value of share was only the market value of the share at the time and his firm had fixed the inflated value only on account of its parting with its managing agency. The Tribunal rejected the assessee’s contention and did not bifurcate the price of the share and the price of the managing agency. It was held (in 31 ITR 643) that as the consideration received by the firm was really a composite consideration for transfer of the shares and the assignment of the managing agency, and the real market value of the share at the time of the sale was only Rs. 46 per share, therefore, for the purposes of Section 12B, the sale price of the share should be taken at Rs. 46 and not at Rs. 65 per share. On the basis of this decision, the learned counsel submitted that it was imperative on the part of the Income-tax Appellate Tribunal to bifurcate the amount of capital gains under two heads: one accrued from the value of the transfer of the shares and the other for transferring the office of the managing directorship. According to him, the Tribunal has erred in law in giving a finding that the entire amount of capital gain has accrued from the price received by the petitioner for the sale of the shares only and not as the price for transferring the power of managing director also.
12. Mr. B. P. Rajgarhia, appearing on behalf of the Department, contended that the question framed should be answered in favour of the Department, because the entire sum of Rs. 1,94,299 could be treated and taxed in law as a capital gain of the assessee. His line of argument is that because the assessee has received the capital gains of Rs. 1,94,299 on account of the transfer of his shares as well as on account of the delegation of power of managing director to Shri Das, it can be assessed under Section 12B of the old Act. According to his submission, the income-tax authorities are
not bound to make any apportionment under the two heads. He vehimently argued that because the petitioner has sold the entire shares held by him in the said bank and, as such, Shri Das by virtue of being the holder of the entire shares became the managing director of the said bank. For being the managing director of the said bank, Shri Das had not paid any consideration money to the petitioner, therefore, according to his submission, the entire capital gains accrued on account of the price for the sale of the shares. Mr. B. P. Rajgarhia relied on two decisions in CIT v. Ramnarain Kapur and Co. Pvt. Ltd. [1968] 69 ITR 719 (Bom) and in Rameshwar Prasad Bagla v. CIT [1973] 87 ITR 421 (SC). In 69 ITR 719, the assessee purchased considerable number of shares in two other companies with a view to acquire managing agencies of these companies, but within a short period sold the entire shares on profit. The ITO held the profit to be income. The AAC as well as the Income-tax Tribunal found on the facts that the purchase and sale were made with the object of acquiring managing agencies only and not with the object of dealing in them by way of business. The question was whether the inference of the Tribunal that the profits are . only capital gains and not trading profit, was in accordance with law. The High Court answered the question in the affirmative. In my opinion, this case does not apply to the instant case, because, in the instant case, the object was not only to acquire the office of the managing directorship (sic). Similarly, the case Rameshwar Prasad Bagla v. CIT [1973] 87 ITR 421 (SC), does not help the Department. There also the object was for acquiring managing agency. I do not feel persuaded to agree with the submissions made by Mr. Rajgarhia. From an examination of Sub-section (2) of Section 12B of the old Act, it is clear that certain deductions are admissible in computing the capital gains of an assessee- Such deductions cannot be ascertained unless the income-tax authorities apportion the entire sum under different heads. The agreement (annexure B) has not been challenged by the Department. The Income-tax Appellate Tribunal has rejected the contention of the assessee on the ground that the petitioner was not the competent authority to delegate the power of managing directorship to Shri Das under the Indian Companies Act. In my opinion, the Tribunal has approached this question on a wrong assumption. I am not here to look into the legality or validity of the competency of the petitioner to delegate the power under the Indian Companies Act, but, in fact, the petitioner has transferred the office of the managing director to Shri Das through deed of agreement (annexure B) for some consideration. It is not disputed that under the Indian income-tax laws any income accruing legally or illegally can be taxed in the hands of the assessee. Therefore, whether the petitioner has power or not to transfer the office is not the question here to be determined, but whether the petitioner has received
some consideration for delegating his power to Shri Das. It is well settled that the taxing authorities are not entitled to ignore the legal character of the transaction, which is the source of the receipt. It is wrong to proceed on what the authorities regard as the substance of the matter. The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. Even if the parties have chosen to conceal by a device the legal relation, it is open to the authorities to unravel the device and to determine the true character of the relationship. The legal effect of the transaction cannot be displaced by probing into the substance of the transaction. In the instant case, the income-tax authorities have come to the conclusion that the entire amount of capital gains has accrued from the sale of the shares of the petitioner ignoring the legal character of the agreement (annexure B) which, in my opinion, is not correct in law. A reference may be made to the case, Addl. CIT v. Govindoss Purshothamdoss [1980] 124 ITR 319 (Mad) and in CIT v. B. M. Kharwar [1969] 72 ITR 603 (SC). In Addl. CIT v. Govindoss Purshothamdoss [1980] 124 ITR 319, on a reference, it was held that the way in which the transaction was reflected in the books of the firm showed that even at the stage of taking out, the asset was parcelled out in accordance with the share of each individual partner and each one of them was debited with the particular amount representing his share and this was consistent with a view that with reference to a fraction of the particular partner’s share, the property had been parted with by the firm at a proportionate valuation.
13. After considering the case laws and the facts and circumstances of the case, I am of the opinion that the Income-tax Appellate Tribunal was not correct in holding that the entire sum of Rs. 1,94,299 could be treated and taxed in law as capital gains of the assessee on account of the sale of the shares only and not also as a price for delegating the power ignoring the legal character of the agreement.
14. For the reasons stated above, the question is answered in the negative, i.e., in favour of the assessee and against the Department. In view of the above finding, the case is remanded to the Income-tax Appellate Tribunal to make apportionment of the capital gains arising out of the sale of the shares as well as the price for the delegation of power and for computing them afresh after deducting certain allowances admissible under the Act.
Nagendra Prasad Singh, J.
15. I agree.