Case: Commissioner Of Income-Tax Vs.  Motors and General Store state Ltd.

other words, there was no price paid or promised to be paid for the transfer of the cinema house known as Sree Rama Talkies together with machinery and equipment described in Schedule I to the deed dated February 21,1956 but there was a consideration in the shape of transfer of 5 per cent tax-free cumulative preference shares of Sri Rama Sugar and Industries Ltd. It follows therefore that the Income-tax authorities were not entitled to treat the transaction dated February 21, 1956 as a sale and to apply provisions of Section 10 (2) (vii) of the Income-tax Act. 6. We pass on to consider the argument of Mr. Narsaraju that in revenue matters it was the substance of the transaction which must be looked at and not the form in which the parties have chosen to clothe the transaction. It was contended that, in the present case, there was in substance a sale of Sree Rama Talkies by the assessee-company for a money consideration of Rs. 1,20,000, though the mode of payment was by transfer of shares and the resolution of the Board of Directors dated September 9, 1955 clearly indicated that the intention of the assessee-company was to sell Sree Rama Talkies along with its equipment concerned for a consideration of Rs. 1,20,000. In the present case, however, there is no suggestion on behalf of the appellant of bad faith on the part of the assessee-company nor is it alleged that the particular form of the transaction was adopted as a cloak to conceal a different transaction. It is not disputed that the document in question was intended to be acted upon and there is no suggestion of mala fides or that the document was never intended to have any legal effect.In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction. In Bank of Chettinad Ltd. v. C. I. T., Madras. 1940-8 ITR 522 = (AIR 1940 PC 183 ), it was pointed out by the Judicial Committee that the doctrine that in revenue cases the substance of the matter may be regarded as distinguished from the strict legal position, is erroneous. If a person, sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown seeking to recover the tax cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.In the Duke of Westminsters case (1935) 19 Tax Cas 490 deeds of covenant had been executed by the Duke in favour of employees in such amount that the covenantees, if remaining in the Dukes service, would receive respectively sums equivalent to their wages and salaries If they left the service of the Duke the payments would still have been due, but it was in nearly all instances explained to the employee that so long as the service continued, while the deed did not prevent his claiming ordinary wages in addition, it was expected, that he would not do so. It was argued for the Crown that though in form a grant of an annuity, the transaction was in substance merely one whereby the annuitant was to continue to serve the Duke at his existing salary, so that the annuity must be treated as salary. Neither the Court of Appeal nor the House of Lords agreed with this contention. To regard the payment under the deed as in effect payments of salary would be to treat a transaction of one legal character as if it were a transaction of a different legal character. With regard to the supposed contrast between the form and substance of the arrangement, Lord Russell of Killowen stated at page 524 as follows : If all that is meant by the doctrine is that having once ascertained the legal rights of the parties you may disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights, well and good. That is what this House did in the case of Secretary of State in Council of India v. Scoble, (1903) AC 299 = (4 T.C. 618); that and no more. If, on the other hand, the doctrine means that you may brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are, then I entirely dissent from such a doctrine. 7. In a later case - Commissioner of Inland Revenue v. Wesleyan and General Assurance Society, (1948) 30 Tax Cas 11 - Viscount Simon expressed the principle as follows: It may be well to repeat two propositions which are wall established in the application of the law relating to Income Tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan ii it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction which, on its true construction, is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]We are unable to accept this argument as correct. In the first place, the document is called exchange deedBut, in our opinion, neither the recital in the preamble nor the resolution of the Board of Directors dated September 9, 1955 will control the language of the operative portion of the document or its legal effect.There is no ambiguity in the construction of the operative part. It is clear from the operative part of the document that there was an exchange of the properties described in Schedule I for 5 per cente cumulative preference shares of Sri Rama Sugar and Industries Ltd., Bobbili. It is true that a valuation of Rupees 1,20,000 was fixed to consist of Rs. 60,000 for immovable properties and the goodwill and Rs. 60,000 for movable properties, but that is only for the purpose of payment of stamp duty.In essence the transaction is one of exchange and there was no sale of the properties described in Schedule I for any money consideration. In other words, there was no price paid or promised to be paid for the transfer of the cinema house known as Sree Rama Talkies together with machinery and equipment described in Schedule I to the deed dated February 21,1956 but there was a consideration in the shape of transfer of 5 per cente cumulative preference shares of Sri Rama Sugar and Industries Ltd. It follows therefore that thex authorities were not entitled to treat the transaction dated February 21, 1956 as a sale and to apply provisions of Section 10 (2) (vii) of theIn the present case, however, there is no suggestion on behalf of the appellant of bad faith on the part of they nor is it alleged that the particular form of the transaction was adopted as a cloak to conceal a different transaction. It is not disputed that the document in question was intended to be acted upon and there is no suggestion of mala fides or that the document was never intended to have any legal effect.In the absence of any suggestion of bad faith or fraud the true principle is that the taxing statute has to be applied in accordance with the legal rights of the parties to the transaction. When the transaction is embodied in a document the liability to tax depends upon the meaning and content of the language used in accordance with the ordinary rules of construction7. In a later caseCommissioner of Inland Revenue v. Wesleyan and General Assurance Society, (1948) 30 Tax Cas 11Viscount Simon expressed the principle as follows:It may be well to repeat two propositions which are wall established in the application of the law relating to Income Tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan ii it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call itSecondly, a transaction which, on its true construction, is of a kind that would escape tax, is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.