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

2. The respondent (hereinafter referred to as the) is a private limited company owning a cinema house called Sree Rama Talkies, at Bobbili. It was being taxed on the profits made by exhibition of films therein. At a meeting of its Board of Directors held on September 9, 1955, it was resolved that the Managing Director, the Raja of Bobbili may be authorised to negotiate with the Zamindar of Chikkavaram or his nominee for the sale of the entire concern with all its equipment and machinery, fittings etc., for a consideration of Rs. 1,20,000. An agreement was concluded to effect a sale and this was confirmed by they at an extraordinary general body meeting held on October 4, 1955. Pursuant thereto a deed called the exchange deed was brought into existence on February 21, 1956 and the consideration was received by they in the shape of transfer of 5 per cent tax free cumulative preference shares in Sri Rama Sugar and Industries Ltd., Bobbili, of the face value of Rs. 1,20,000 held by the Zamindar and Zamindarini of Chikkavaram. Separate valuation was given for the immovable property and for the movables etc., and goodwill, each being valued at Rupees 60,000. For the assessment yeary submitted a return of income showing a sum of Rs. 9,823 as profits derived from the transaction. Thex Officer found that the value realised exceeded the written down value by Rs. 43,568 and accordingly computed the profits under Section 10 (2) (vii) of thex Act, 1922 and included the amount in the taxable income of the. The order of thex Officer was confirmed by the Appellate Assistant Commissioner in appeal and by thex Appellate Tribunal except for allowing a sum of Rs. 5,000 as representing the cost of the goodwill. As directed by the High Court, the Appellate Tribunal stated a case under Section 66 (2) of thex Act, 1922 on the following questions of law :(1) Whether the transaction dated6 amounts to a sale within the purview of the second proviso to Section 10 (2) (vii) of the Indian(2) Whether the consideration for the sale is not the market value of the shares as on the date of the transaction, namely, Rs. 95 per share, but the face value of the sharesAfter hearing the reference the High Court answered the question in favour of they and against the Commissioner of

Reasoning: 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.