M/S. ORIENT TRADING COMP ANY LIMITED vs. COMMISSIONER OF INCOME TAX CALCUTTA

CIVIL APPEAL No. 353/1981Supreme Court[1997] 1 S.C.R. 44621 January 1997Bench: 2 JudgesAuthor: S.C. AGRAWAL, G.T. NANAVATI8 pages
AI SummaryDismissed

What were the facts?

M/s. Orient Trading Company Limited (the assessee) held 14,500 shares of Asiatic Oxygen & Acetylene Company Limited (the first company) as stock-in-trade, valued at Rs. 1,45,000 at the end of assessment year 1962-63. In the subsequent assessment year (1963-64), the assessee exchanged these shares for 55,100 shares of a new company, Asiatic Oxygen Ltd. (the second company), at a ratio of 38 shares of the second company for every 10 shares of the first. The assessee valued the new shares at Rs. 1,45,000, its cost price for the original shares. The Income Tax Officer disagreed, valuing the second company's shares at Rs. 10 each, totaling Rs. 5,51,000, and assessed a profit of Rs. 4,06,000. The Appellate Assistant Commissioner and the Tribunal dismissed the assessee's appeals. The High Court, on reference, answered the question of whether the exchange constituted realization of security resulting in profit against the assessee.

What did the Supreme Court hold?

The Supreme Court held that the High Court was correct in its decision. The exchange of shares of one company for shares of another company is to be treated as a realization of the security. The assessee, by receiving shares of the second company in exchange for shares of the first company, had realized the value of the shares of the first company. The difference between the value of the shares of the first company (cost price) and the value of the shares of the second company on the date of exchange, which amounted to Rs. 4,06,000, was correctly treated as profit and assessed as income. The Court affirmed the principles laid down in cases like Royal Insurance Co. Ltd. v. Stephen and Westminster Bank Ltd. v. Osler (Inspector of Taxes), and distinguished the case of British South Africa Co. v. Varty (Inspector of Taxes). The decision in CIT v. Motors and General Stores Pvt. Ltd. was held inapplicable. The appeal was dismissed. An application for urging additional grounds was also dismissed.

What were the issues?

1. Whether, on the facts and circumstances of the case, the exchange of one security for another can be described as realization of the security resulting in profit, under Section 14 and Section 28(i) of the Income Tax Act, 1961. Assessee's contentions: - The assessee, being a dealer in shares and holding the shares as stock-in-trade, did not earn profit merely by exchanging them for shares of another company. Profit is earned only upon selling the shares of the second company at a price higher than the book value. - The exchange of shares does not constitute a sale. - Relied on: Commissioner of Income Tax, Andhra Pradesh v. Motors & General Stores (P) Ltd. (1967) 66 ITR 692 and British South Africa Co. v. Varty (Inspector of Taxes) (1966) AC 381. Revenue's contentions: - Not recorded in the judgment, but implicitly supported the High Court's finding that the exchange constituted realization of profit.

Which sections of the Income-tax Act were involved?

Section 14,Section 28(i)

AI-generated summary — verify with the full judgment below

A M/S. ORIENT TRADING COMP ANY LIMITED -+- v. COMMISSIONER OF INCOME TAX CALCUTTA JANUARY 21, 1997 B [S.C. AGRAWAL AND G.T. NANAVATI, JJ.] Income Tax Act; 1961-Sections 14 and 28(ij--Excess value of shares ~~ received by the assessee on swrendeling the shares of one company in ex- change of the shares of another company-Held : can be regarded as realisa- c ti on of the secwity and has to be treated as profit of the assessee and there/ ore assessable as income.

The assessee was holding 14,500 shares of a company of the face value of Rs.10 each as its stock-in-trade. The shares were valued by the assessee at Rs. 1,45,000 at the end of the assessment year 1962-63 and were D included in the closing stock. In the assessment year under reference, the '?-- assessee exchanged these sharies with 55100 shares of another company.

The face value of the shares of the second company was Rs.10 per share.

The assessee, however, valued the shares of the second company also at Rs.1,45,000 being the cost prke of the shares of the first company. Th,e E Income Ta" Officer did not accept the contention that the assessee had not earned any profit in the transaction. He valued the shar

The order continues below.

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