{"id":51578,"date":"1997-01-21T00:00:00","date_gmt":"1997-01-20T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/ms-orient-trading-company-ltd-vs-commissioner-of-income-on-21-january-1997"},"modified":"2016-07-31T06:38:34","modified_gmt":"2016-07-31T01:08:34","slug":"ms-orient-trading-company-ltd-vs-commissioner-of-income-on-21-january-1997","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/ms-orient-trading-company-ltd-vs-commissioner-of-income-on-21-january-1997","title":{"rendered":"M\/S Orient Trading Company Ltd vs Commissioner Of Income … on 21 January, 1997"},"content":{"rendered":"
Supreme Court of India<\/div>\n
M\/S Orient Trading Company Ltd vs Commissioner Of Income … on 21 January, 1997<\/div>\n
Bench: S.C. Agrawal, G.T. Nanawati<\/div>\n
           PETITIONER:\nM\/S ORIENT TRADING COMPANY LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAXCALCUTTA\n\nDATE OF JUDGMENT:\t21\/01\/1997\n\nBENCH:\nS.C. AGRAWAL, G.T. NANAWATI\n\n\n\n\nACT:\n\n\n\nHEADNOTE:\n\n\n\nJUDGMENT:\n<\/pre>\n
\t\t      J U D G M E N T
\n     This appeal  by the  assessee arises  out of Income Tax
\nReference No.  279 of  1973 made  at  the  instance  of\t the
\nassessee which was disposed of by the Calcutta High Court by
\nthe impugned  judgment dated August 25, 1978. Out of the two
\nquestions referred  to it  for its  opinion, the  High Court
\ndeclined to  answer question  No. 1 as it did not arise from
\nthe  judgment\tof  the\t  Income  Tax\tAppellate   Tribunal
\n(hereinafter referred to as `the Tribunal’) and question No.
\n2 was  answered against\t the assessee  and in  favour of the
\nRevenue. The said question was in these terms:-\n<\/p>\n
     “Whether the  Tribunal was right in
\n     holding  that   on\t the  facts  and
\n     circumstances  of\t the  case   the
\n     exchange  of   one\t  security   for
\n     another  could   be  described   as
\n     realisation   of\t the\tsecurity
\n     resulting in profit?”<\/p><\/blockquote>\n
     The matter\t relates to  the assessment year 1963-64 for
\nthe relevant  previous year  ended on  July  31,  1962.\t The
\nassessee is  a company\tdealing in  shares. It\twas  holding
\n14500 shares  of Asiatic  Oxygen & Acetylene Company Limited
\n(hereinafter referred  to as  `the first  Company’), of\t the
\nface value  of Rs. 10\/- each as its stock-in-trade. The said
\nshares were  valued by\tthe assessee  at Rs. 1,45,000\/- (the
\ncost price)  at the  end of  the assessment year 1962-63 and
\nwere included  in the  closing stock. In the assessment year
\nunder  reference   a  new   company,  Asiatic\tOxygen\tLtd.
\n(hereinafter referred  to as  `the second Company’) had made
\nan offer  to obtain  shares of the first Company in exchange
\nfor the allotment of its own shares at the rate of 38 equity
\nshares in  the second  company for  10 equity  shares in the
\nfirst company.\tThe assessee  accepted the  said  offer\t and
\nreceived 55,100\t shares of the second company in exchange of
\nthe aforesaid holding of 14,500 shares in the first company.
\nThe face  value of  the shares of the second Company was Rs.
\n10\/- per  share. The assessee, however, valued the shares of
\nthe second  Company also  at Rs.  1,45,000\/- being  the cost
\nprice of  the shares  of the  first Company.  The Income Tax
\nOfficer did  not accept\t the contention of the assessee that
\nit had\tnot earned  any profit\tin the transaction. He found
\nthat the  market quotation  of\tthe  shares  of\t the  second
\nCompany, as  on 11th  August, 1962, i.e., only 11 days after
\nthe close  of the  relevant previous year, was Rs. 10.12 per
\nshare. He  valued the  shares of  the second  company of Rs.
\n10\/- per share and held that Rs. 5,51,000\/- was the value of
\nthe shares  of the  second Company. He, therefore, held that
\nthe assessee  had earned  a profit  of Rs. 4,06,000\/- in the
\nsaid transaction  and brought  that amount  to\ttax  as\t the
\nassessee’s income  from share  dealings. The appeal filed by
\nthe  assessee  was  dismissed  by  the\tAppellate  Assistant
\nCommission and\ton further  appeal the Tribunal rejected the
\ncontention of  the assessee and that the transaction did not
\nresult in  any profit. The Tribunal rejected the application
\nof the\tassessee for  referring to  the High  Court for\t its
\nopinion the  questions raised  by the  assessee but the High
\nCourt by order dated February 18, 1974 directed the Tribunal
\nto state  a case  and refer  the two questions raised by the
\nassessee and consequently the two questions were referred by
\nthe Tribunal  out of  which question No. 2 has been answered
\nagainst the  assessee by  the High  court  by  the  impugned
\njudgment.\n<\/p>\n
     Shri H.K.\tPuri, the  learned counsel for the assessee,
\nhas urged  that the High Court was in error in answering the
\nsaid question  against the assessee. According to Shri Puri,
\nsince the  assessee has\t been found to be a dealer in shares
\nand the\t shares of  the first  Company held by assessee were
\npart of\t its stock-in-trade, the fact that those shares were
\nexchanged with\tthe shares  of the second Company would not,
\nby itself,  mean that  the assessee  had earned\t a profit in
\nthat transaction. According to Shri Puri, the assessee could
\nbe said\t to have  earned profit in the transaction only when
\nit would  have sold  the shares\t of the\t second Company at a
\nprice higher  than that entered\t in its books. Shri Puri has
\nalso submitted\tthat the  process of obtaining the shares of
\nthe second  Company in\texchange for the shares of the first
\nCompany does  not constitute  a sale and has placed reliance
\non the decision of this Court in Commissioner of Income Tax,
\nAndhra Pradesh\tv. Motors  & General Stores (P) Ltd.,<\/a> (1967)
\n66 ITR\t692. Shri  Puri has  also  placed  reliance  on\t the
\ndecision of  the House\tof Lords in British South Africa Co.
\nv.  Varty  (Inspector  of  Taxes),  1966  AC  381,  and\t has
\nsubmitted that\tthe  decision  of  the\tHouse  of  Lords  in
\nWestminster Bank, Ltd. v. Osler (Inspector of Taxes), (1933)
\n1 ITR  65, referred  to in the impugned judgment of the High
\nCourt, has  been distinguished\tby the House of Lords in the
\nsubsequent decision  in the case of British South Africa Co.
\nv. Varty (Inspector of Taxes) (supra).\n<\/p>\n
     The question  that arises\tfor consideration is whether
\nthe surrendering  of its  shares in  the  first\t Company  in
\nexchange for  the  shares  of  the  second  Company  by\t the
\nassessee can  be regarded  as realisation of the security on
\nthe date  of such  surrender and  exchange. If\tit can be so
\nregarded that  the sum\tof Rs.\t4,06,000\/-,  the  difference
\nbetween the book value of 14,500 shares of the first Company
\nand the\t market value  of the  55,500 shares  of the  second
\nCompany as on the date of the such realisation, will have to
\nbe  treated  as\t profit\t earned\t by  the  assessee  in\tthat
\ntransaction.\n<\/p>\n
     In the impugned judgment the High Court has agreed with
\nthe decision of the Tribunal that the exchange of the shares
\nof the\tfirst Company  with the shares of the second Company
\nis to  be treated  as realisation  of the security. The said
\nview of\t the High  Court, as  will be  presently seen, is in
\nconsonance with the established principles governing the law
\nin this field.\n<\/p>\n
     In Westminister  Bank,  Ltd.  v.  Osler  (Inspector  of
\nTaxes) (supra)\tthe appellant was holding National War Bonds
\nwhich were  surrendered in  exchange for conversion loan and
\nwar loan and the value of the stock received in exchange was
\ngreater than the cost to the Bank of the National War Bonds.
\nThe question was whether the excess amount could be regarded
\nas profit  of the  Banker’s trade  for the purpose of income
\ntax. On\t behalf of the Bank it was argued that the nature of
\nthe transaction was equivalent to a mere exchange of an item
\nin the\tstock-in-trade of  the trader and that in fact there
\nwas no\trealisation of profit and there was a mere accretion
\nof capital  value which\t could not  be brought\tinto account
\nuntil in fact it had been realised.\n<\/p>\n
     Dealing with the said contention Lord Buckmaster said:
\n     “The  exchange   effected\tin   the
\n     present case  was in fact the exact
\n     equivalent of what would have taken
\n     place had\tinstructions been  given
\n     to\t sell\tthe  original  sock  and
\n     invest  the  proceeds  in\tthe  new
\n     security.\t    The\t      investment
\n     represented  by  the  original  War
\n     Bonds came to an end as soon as the
\n     new securities  were taken\t in  its
\n     place, when a new venture was begun
\n     in relation to the new holding, and
\n     the fact  that this  transformation
\n     took  place   by  the   process  of
\n     exchange does  not in  any\t opinion
\n     avoid the conclusion that there has
\n     been  what\t  is  described\t  as   a
\n     realisation of the security.”\n<\/p>\n
     [pp. 68, 69]
\n     The decision of Rowlatt, J. in Royal Insurance Co. Ltd.
\nv. Stephen,  14 Tax Cases 22, was approved in the said case.
\nIn the\tcase of\t Royal Insurance Co. Ltd. v. Stephen (supra)
\nthe appellant  company had, under the Railways Act, 1921, to
\naccept new  stocks in  the amalgamated companies in exchange
\nfor the\t stock held in the companies which were absorbed and
\nwhich resulted\tin loss\t to the appellant-company. The claim
\nof the\tappellant-company for  deduction of  such  loss\t was
\nupheld by Rowlatt, J. who held:-\n<\/p>\n
     “At the bottom of this principle of
\n     waiting for  a realisation, I think
\n     there  is\t this  idea;   while  an
\n     investment is  going up or down for
\n     Income  Tax   purpose  the\t Company
\n     cannot   take    any   notice    of
\n     fluctuations, but\tit has\tto  take
\n     notice of\tthem when all that state
\n     of affairs\t comes to  an end,  when
\n     that investment  is wound up I will
\n     say –  “wound up” is an unfortunate
\n     expression perhaps\t and I\twill say
\n     when an investment ceases to figure
\n     in the  Company’s affairs,\t when it
\n     is known  exactly what  the holding
\n     of that  investment has meant, plus
\n     or minus  to the  Company, and then
\n     the Company  starts so  far as that
\n     portion   of   its\t  resources   is
\n     concerned with  a\tnew  investment.
\n     Then one  knows where one is and it
\n     is no  longer a  question of paper,
\n     it is  a question\tof fact and that
\n     is a  realisation. I  think that is
\n     the point\tof view\t from  which  it
\n     ought to  be looked at, and looking
\n     at it  from that  point of view the
\n     Company is\t right. It has done with
\n     the investments  in the  companies.
\n     They have\tdisappeared. It is known
\n     exactly in\t money. It  is known now
\n     exactly what  their holding of them
\n     has meant to the Company. They will
\n     never more go up or down. What will
\n     go up or down now are the different
\n     shares  in\t  the\tnew   companies,
\n     altogether\t different   investments
\n     really, and  therefore I think that
\n     the old  investment is  closed  and
\n     realised and  a new  investment  is
\n     started.”<\/p><\/blockquote>\n
     [pp. 28, 29]
\n     Similarly in  California Copper  Syndicate v. Harris, 5
\nTaxes Case  159, decided  by  the  Court  of  Ex-chequer  in
\nScotland, Lord Trayner has said:-\n<\/p>\n
     “But it  was said that the profit –
\n     if it was profit – was not realised
\n     profit and, therefore, not taxable.
\n     I think  the profit was realised. A
\n     profit is\trealised when the seller
\n     gets the  price  he  had  bargained
\n     for. No  doubt here  the price took
\n     the form  of fully\t paid shares  in
\n     another company,  but, if there can
\n     be no  realised profit, except when
\n     that is  paid in  cash, the  shares
\n     were realisable and could have been
\n     turned into cash, if the appellants
\n     had been pleased to do so. I cannot
\n     think that Income Tax is due or not
\n     according to  the manner  in  which
\n     the  person   making   the\t  profit
\n     pleases to deal with it.”<\/p><\/blockquote>\n
     [p. 167]
\n     These observations\t have been  quoted with\t approval by
\nthis Court  in Raja  Mohan Raja\t Bahadur v.  Commissioner of
\nIncome Tax,  U.P.<\/a> (1967)  66 ITR  378.\tIn  that  case,\t the
\nassessee,  carrying   on  business  of\tmoney  lending,\t had
\nobtained  a   decree  against  a  debtor  and  had  received
\nEncumbered  Estate   Bonds  of\t U.P.  Government   in\tpart
\nsatisfaction of\t the liability of the debtor. The said Bonds
\nwere sold  by the  appellant in\t the year  relevant  to\t the
\nassessment year\t subsequent to\tthe year  in which they were
\nreceived. It  was held\tthat the Bonds were a fresh security
\nthe liability of the original debtor having been substituted
\nby an  obligation by  the State\t and since  the\t Bonds\twere
\nconvertible in\tterms of  money, income\t was realised by the
\nassessee when the bonds were received.\n<\/p>\n
     The subsequent  decision  of  the\tHouse  of  Lords  in
\nBritish Sough  Africa Co.  v.  Varty  (Inspector  of  Taxes)
\n(supra) does  not lend\tassistance to the submission of Shri
\nPuri. In  that case  the appellant-company  in 1953 had lent
\n200,000 pounds\tto a  gold mining  company and in return had
\nreceived, inter\t alia, an  option to  subscribe for  100,000
\nshares in the mining company at 1 pound per share, the value
\nof the\tshares then being 19 S.6 d a share. In 1954 when the
\nvalue of  the shares  ad gone  up to  43 S.6  d a  share the
\nappellant exercised  the option\t and obtained  shares  worth
\n217,500 pounds\tfor which  they\t paid  100,000\tpounds.\t The
\ncompany was  assessed for income tax on a profit of 117,5000
\npounds. On  behalf of the company it was urged that upon the
\nexercise of  the option\t there was a realisation because the
\noption which was a “trading asset” or an item of  “stock-in-
\ntrade” was exchanged for or was replaced by a different item
\nof stock-in-trade  which had  a value  in money’s worth. The
\nsaid contention\t was rejected  by the  House of\t Lords (Lord
\nGuest dissenting).  IT was  held that  the appellant-company
\nnever, in  fact, realised  their  option  in  the  sense  of
\npassing it  on, for a consideration to someone else and that
\nthere was  neither a  sale of the option or its exchange for
\nsomething else\tand that  when the  company exercised  their
\noption or  used or  availed themselves\tof their rights they
\ndid not\t make the  end of  the trading\ttransaction and that
\nthere was  merely the  end of  the beginning  of  a  trading
\ntransaction. It\t was emphasised that there was no element of
\nexchange as there was in Royal Insurance Co. Ltd. v. Stephen
\n(supra) and  in Westminister  Bank, Ltd. v. Osler (Inspector
\nof Taxes)  (supra). [See  : Lord  Morris of  Borth-Y-Gest at
\npp.394-395]. Lord Guest, in his dissenting judgment, however
\nfelt that  the option  was a trading asset of the appellant-
\ncompany and,  applying the  principles laid  down  in  Royal
\nInsurance Co. Ltd. v. Stephen (supra) and Westminister Bank,
\nLtd. v.\t Osler (Inspector  of Taxes)  (supra), held that the
\nexercise of  option amounted  to a realisation of the option
\nwhich resulted\tin a trading profit of 117,5000 pounds. This
\nwould show  that the principles laid down in Royal Insurance
\nCo. Ltd.  v. Stephen  (supra) and Westminister Bank, Ltd. v.
\nOsler (Inspector of Taxes) (supra) have been affirmed by all
\nthe law\t Lords and  the difference  amongst them was only as
\nregards the  applicability of  the said\t principles  to\t the
\nfacts of that case.\n<\/p>\n
     Commissioner of  Income Tax, Andhra Pradesh v. Motors &
\nGeneral\t  Stores   (P)\t Ltd.<\/a>\t(supra)\t  relates   to\t the
\ninterpretation of  the word  “sale” in Section 10(2)(vii) of
\nthe Income  Tax Act,  1922. The said decision has no bearing
\non the present case.\n<\/p>\n
     Having regard  to\tthe  principles\t laid  down  in\t the
\ndecisions aforementioned,  it must  be held  that  the\tHigh
\nCourt has  rightly taken  the view that as a result of their
\nhaving taken the shares in the second Company in exchange of
\nthe shares  of the  first  Company  the\t assessee  had\tmade
\nrealisation of\tthe value of the shares of the first Company
\nand the\t difference between  the price\tof the shares of the
\nfirst Company  and the\tsecond Company\ton the\tdate of such
\nexchange, i.e.,\t Rs. 4,06,000\/-,  has to  be  treated  as  a
\nprofit of  the assessee\t and has  been rightly\tassessed  as
\nincome of the assessee. We, therefore, do not find any merit
\nn the  appeal and  the same is accordingly dismissed. But in
\nthe circumstances no order as to costs.\n<\/p>\n
     The assessee has also made an application for urging
\nadditional grounds wherein it is requested that additional
\nquestion as mentioned in paragraph 9 of the said application
\nmay be framed or directed to be called for by the High Court
\nfrom the Tribunal. We have perused the said application. We
\ndo not find any merit in the same. It is accordingly
\ndismissed.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India M\/S Orient Trading Company Ltd vs Commissioner Of Income … on 21 January, 1997 Bench: S.C. Agrawal, G.T. Nanawati PETITIONER: M\/S ORIENT TRADING COMPANY LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME TAXCALCUTTA DATE OF JUDGMENT: 21\/01\/1997 BENCH: S.C. AGRAWAL, G.T. NANAWATI ACT: HEADNOTE: JUDGMENT: J U D G M E N T […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-51578","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nM\/S Orient Trading Company Ltd vs Commissioner Of Income ... on 21 January, 1997 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/ms-orient-trading-company-ltd-vs-commissioner-of-income-on-21-january-1997\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"M\/S Orient Trading Company Ltd vs Commissioner Of Income ... on 21 January, 1997 - 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