Case: M/s. Orient Trading Company Limited Vs. Commissioner of Income Tax, Calcutta

point of view from which it ought to be looked at, and looking at it from that point of view the company is right. It has done with the investments in the companies. They have disappeared. It is known exactly in money. It is known now exactly what their holding of them has meant to the company. They will never more go up or down. What will go up or down now are the different shares in the new companies, altogether different investments really, and therefore I think that the old investment is closed and realised and a new investment is started." * 9. Similarly in Californian Copper Syndicate Ltd. v. Inland Revenue (Harris, Surveyor of Taxes) [5 TC 159], decided by the Court of Exchequer in Scotland, Lord Trayner has said : (TC p. 167) "But it was said that the profit - if it was profit - was not realised profit and, therefore, not taxable. I think the profit was realised. A profit is realised when the seller gets the prince he had bargained for. No doubt here the price took the form of fully paid shares in another company, but, if there can be no realised profits, except when that is paid in cash, the shares were realisable and could have been turned into cash, if the appellants had been pleased to do so. I cannot think that income tax is due or not according to the manner in which the person making the profits pleases to deal with it." * 10. These observations have been quoted with approval by this Court in Raja Mohan Raja Bahadur v. CIT. In that case, the assessee, carrying on business of moneylending, had obtained a decree against a debtor and had received Encumbered Estate Bonds of U. P. Government in part satisfaction of the liability of the debtor. The said Bonds were sold by the appellant in the year relevant to the assessment year subsequent to the year in which they were received. It was held that the Bonds were a fresh security, the liability of the original debtor having been substituted by an obligation by the State and since the Bonds were convertible in terms of money, income was realised by the assessee when the bonds were received 11. The subsequent decision of the House of lords in British South Africa Co. v. Varty (Inspector of Taxes) 1966 AC 381 : 1965 (2) All(ER) 395: 1965 (3) WLR 47] does not lend assistance to the submission of Shri Puri. In that case the appellant-company in 1953 had lent 200, 000 pounds to a gold mining company and in return had received, inter alia, an option to subscribe for 100, 000 shares in the mining company at 1 pound per share, the value of the shares then being 19 Sh. 6 d a share. In 1954 when the value of the shares had gone up to 43 Sh. 6 d a share the appellant exercised the option and obtained shares worth 217, 500 pounds for which they paid 100, 000 pounds. The company was assessed for income tax on a profit of 11, 75, 000 pounds. On behalf of the company it was urged that upon the exercise of the option there was a realisation because the option which was a "trading asset" or an item of "stock-in-trade" was exchanged for or was replaced by a different item of stock-in-trade which had a value in moneys worth. The said contention was rejected by the House of Lords (Lord Guest, dissenting). It was held that the appellant-company never, in fact, realised their motion in the sense of passing it on for a consideration to someone else and that there was neither a sale of the option or its exchange for something else and that when the company exercised their option or used or availed themselves of their rights they did not make the end of the trading transaction and that there was merely the end of the beginning of a trading transaction. It was emphasised that there was no element of exchange as there was in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and in Westminster Bank Ltd. v. Osler (Inspector of Taxes) [HL]. (See Lord Morris of Borth-Y-Gest at pp. 394-395.) Lord Guest, in his dissenting judgment, however felt that the option was a trading asset of the appellant-company and, applying the principles laid down in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and Westminster Bank Ltd. v. Osler (Inspector of Taxes) [HL], held that the exercise of option amounted to a realisation of the option which resulted in a trading profit of 11, 75, 000 pounds. This would show that the principles laid down in Royal Insurance Co. Ltd. v. Stephen [(1928) 14 TC 22 : 44 TLR 630] and Westminster Bank Ltd. v. Osler (Inspector of Taxes) [HL] have been affirmed by all the Law Lords and the difference amongst them was only as regards the applicability of the said principles to the facts of that case 12. CIT v. Motors & General Stores (P) Ltd. relates to the interpretation of the word "sale" in Section 10(2) (vii) of the Income Tax Act, 1922. The said decision has no bearing on the present case 13. Having regard to the principles laid down in the decisions aforementioned, it must be held that the High Court has rightly taken the view that as a result of their having taken the shares in the second company in exchange of the shares of the first company the assessee had made realisation of the value of the shares of the first company and the difference between the price of the shares of the first company and the second company on the date such exchange, i.e., Rs. 4, 06, 000, has to be treated as a profit of the assessee and has been rightly assessed as income of the assessee.

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

Explanation:
0[ds]13. Having regard to the principles laid down in the decisions aforementioned, it must be held that the High Court has rightly taken the view that as a result of their having taken the shares in the second company in exchange of the shares of the first company theassesseehad made realisation of the value of the shares of the first company and the difference between the price of the shares of the first company and the second company on the date such exchange, i.e., Rs. 4, 06, 000, has to be treated as a profit of theassesseeand has been rightly assessed as income of the